Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration
statement.

If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check
the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list
the Securities Act registration number of the earlier effective registration statement for the same offering. o

If this Form is a post effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o(Do not check if a
smaller reporting company)

Smaller reporting company ý

CALCULATION OF REGISTRATION FEE

Title of Each Class of
Securities to be Registered

Amount to
be Registered(1)

Proposed Maximum
Offering Price
per Share(2)

Proposed Maximum
Aggregate Offering
Price(2)

Amount of
Registration Fee(3)

Common stock, par value $0.0001 per share

2,875,000

$10.33

$29,698,750

$3,403.48

(1)

Includes
375,000 shares that the underwriters have an option to purchase to cover over-allotments, if any.

(2)

Estimated
solely for the purpose of calculating the registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as amended,
based on the average of the high and low trading prices for the common stock as reported by the Nasdaq Capital Market on July 27, 2012.

(3)

Previously
paid.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or
until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to
buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED AUGUST 8, 2012

2,500,000 Shares
Common Stock
$ per share

We are selling 2,500,000 shares of our common stock. We have granted the underwriters a 30-day option to purchase up to an
additional 375,000 shares from us to cover over-allotments, if any.

In
accordance with a securities purchase agreement, dated February 6, 2012, by and among us and the purchasers party thereto, within 30 days after the closing of this
offering, we will offer to sell those purchasers an aggregate of 25% of the number of shares sold in this offering plus the number of shares offered pursuant to the preemptive rights granted under the
February 2012 securities purchase agreement, with the number of shares each purchaser will have a right to purchase being based on the purchaser's pro rata portion of the total number of shares sold
pursuant to the February 2012 securities purchase agreement. Any sales made pursuant to these preemptive rights must be completed within 60 days of the date we provide notice to the purchasers
of the transaction giving rise to their preemptive right thereunder. Any sales we make pursuant to the February 2012 securities purchase agreement as a result of this offering will be on the same
terms and conditions as this offering. We intend to file with the Securities and Exchange Commission, or SEC, and have declared effective, a registration statement covering all shares we sell pursuant
to any exercise of these preemptive rights. We cannot determine at this time how many shares, if any, the purchasers under the February 2012 securities purchase agreement will purchase pursuant to
their preemptive rights thereunder.

This
is a public offering of our common stock. Our common stock is listed on the Nasdaq Capital Market under the symbol "SSH." The closing price of our common stock on the Nasdaq Capital
Market on July 27, 2012 was $10.01 per share.

WE ARE AN "EMERGING GROWTH COMPANY" UNDER THE U.S. FEDERAL SECURITIES LAWS AND WILL BE SUBJECT TO REDUCED PUBLIC COMPANY REPORTING REQUIREMENTS.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8.

Per Share

Total

Public offering price

$

$

Underwriting discount(1)

$

$

Proceeds, before expenses, to us

$

$

(1)

In
addition to the underwriters' discount paid by us, we have also committed to reimburse the underwriters for certain expenses up to an
aggregate of $125,000. See "Underwriting."

The
underwriters are offering the common stock as set forth in the "Underwriting" section.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal offense.

You should rely only on the information contained in this prospectus and any free-writing prospectus that we authorize to be distributed to you. We
have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus or any related free-writing prospectus
that we authorize to be distributed to you. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The
information in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies, regardless of the time of delivery of this
prospectus or of any sale of our common stock.

C-Pulse®, Sunshine®, Sunshine HeartTM, C-PatchTM and other trademarks or service marks
of Sunshine Heart appearing in this prospectus are the property of Sunshine Heart, Inc. Trade names, trademarks and service marks of other companies appearing in this registration statement are
the property of the respective owners.

We
obtained industry and market data used throughout this prospectus through our research, surveys and studies conducted by third parties and industry and general publications. We have
not independently verified market and industry data from third-party sources.

In
this prospectus, "company," "we," "our," and "us" refer to Sunshine Heart, Inc. and its subsidiary, except where the context otherwise requires.

All
references in this prospectus to "$" are to U.S. Dollars and all references to "A$" are to Australian Dollars.

Investing in our common stock involves a high degree of risk. We believe the risks described under the caption
"Risk Factors" below and elsewhere in this prospectus are the material risks we face. However, these risks may not be the only risks we face. Additional unknown risks or risks that we currently
consider immaterial may also impair our business operations. If any of the events or circumstances described actually occurs, our business, financial condition or results of operations could suffer,
and the trading price of our common stock could decline significantly. Investors should consider the specific risk factors discussed under the caption "Risk Factors" below and elsewhere in this
prospectus, together with the "Special Note Regarding Forward-Looking Statements" and the other information contained in this prospectus, including our financial statements and the related notes,
before investing in our common stock.

Our Business

Overview

We are an early-stage medical device company focused on developing, manufacturing and commercializing our C-Pulse Heart
Assist System, or C-Pulse System, for treatment of Class III and ambulatory Class IV heart failure. The C-Pulse System utilizes the scientific principles of
intra-aortic balloon counter-pulsation applied in an extra-aortic approach to assist the left ventricle by reducing the workload required to pump blood throughout the body, while increasing blood flow
to the coronary arteries.

We
are in the process of pursuing regulatory approvals necessary to sell our system in the United States. We completed enrollment of our North American feasibility clinical trial in the
first half of 2011. In November 2011, we announced the preliminary results of the six-month follow-up period for the feasibility study and we submitted the clinical data to the
United States Food and Drug Administration, or FDA. In March 2012, the FDA notified us that it completed its review of the C-Pulse System feasibility trial data, concluded we met the
applicable agency requirements, and indicated that we can move forward with an investigational device exemption, or IDE, application. We expect to submit an IDE application to the FDA in the second
half of 2012 for approval to initiate our pivotal trial. We expect to complete enrollment of our pivotal trial by the end of 2015 and do not anticipate marketing our system in the United States before
2017.

We
obtained CE Mark approval for the C-Pulse System in July 2012 and have taken initial steps to evaluate the market potential for our system in targeted countries that
accept the CE Mark in anticipation of commencing commercial sales. In order to gain additional clinical data and support reimbursement in Europe, we also expect to initiate a post-market
trial in Europe that will evaluate endpoints similar to those for our U.S. pivotal trial.

We
incurred net losses of $16.2 million and $7.6 million in the years ended December 31, 2011 and 2010, respectively, and $6.7 million in the six months ended
June 30, 2012. Historically, we have generated our revenue solely from sales of the C-Pulse System to hospitals and clinics pursuant to research arrangements and with appropriate
regulatory approvals for sales in conjunction with our feasibility clinical trial. We expect to continue to incur significant net losses as we continue to conduct clinical trials, pursue
commercialization and as we ramp up sales of our system.

Our Market Opportunity

Heart failure is one of the leading causes of death in the United States and other developed countries. The American Heart Association
estimates that 5.7 million people in the United States age 20 and over are affected by heart failure, with an estimated 670,000 new cases diagnosed each year. Nearly 30% of heart

failure
patients are below the age of 60, and congestive heart failure is the highest U.S. chronic health care expense category.

Heart
failure is a progressive disease caused by impairment of the heart's ability to pump blood to the various organs of the body. Patients with heart failure commonly experience
shortness of breath, fatigue, difficulty exercising and swelling of the legs. The heart becomes weak or stiff and enlarges over time, making it harder to pump the blood needed for the body to function
properly. The severity of heart failure depends on how well a person's heart is able to pump blood throughout the body. A common measure of heart failure severity is the New York Heart Association, or
NYHA, Class guideline. Patients are classified in Class I through Class IV based on their symptoms and functional limitations. Classes I and II include mild heart failure
patients, Class III includes moderate heart failure patients, and Class IV includes severe heart failure patients.

Our
C-Pulse System targets Class III and ambulatory Class IV patients as defined by the NYHA. It is estimated that approximately 1.5 million heart
failure patients in the United States fall into this classification range, and we believe approximately 3.7 million patients in Europe are similarly affected.

Treatment
alternatives currently available for Class III heart failure patients in the United States consist primarily of pharmacological therapies and pacing devices that are
designed to address heart rhythm issues. Although these treatments may provide symptomatic relief and prolong the life of patients, they do not often halt the progression of congestive heart failure.
Circulatory assist devices, specifically left ventricular assist devices, or LVADs, have been used to treat Class IV patients in the United States, and one product received FDA approval in the
United States for Class IIIb patients although the device is not reimbursed by the Centers for Medicare and Medicaid Services, or CMS, for Class IIIb patients. These devices are designed
to take over some or all of the pumping function of the heart by mechanically pumping blood into the aorta. Although such products are effective in increasing blood flow, these devices are implanted
in the patient's body and by design are in contact with the patient's bloodstream, increasing the risk of adverse events, including thrombosis, bleeding and neurologic events. The FDA recently
rejected a proposed clinical trial that would evaluate the safety and performance of an LVAD technology for Class III heart failure patients because they did not believe the technology risks
outweighed the potential rewards for these patients.

Our Strategy

Our goal is to become a market leader in the treatment of heart failure patients through the commercialization of our
C-Pulse System, and to continue the development of the system to make it safer and more convenient for patients and physicians. We believe that our technology will provide us with a
competitive advantage in the market for treating specific segments of heart failure patients. To achieve our objectives, we intend to:



plan for the commercial launch of the C-Pulse System in Europe;



obtain IDE approval for our pivotal trial in the United States;



conduct a pivotal trial in the United States;



conduct trials in Europe to support reimbursement of the C-Pulse System; and



continue to enhance the C-Pulse System.

Our System

The C-Pulse System utilizes the scientific principles of intra-aortic balloon counter-pulsation applied in an extra-aortic
approach to assist the left ventricle by reducing the workload required to pump blood throughout the body, while increasing blood flow to the coronary arteries. Combined, these potential benefits

may
help sustain the patient's current condition or, in some cases, reverse the heart failure process, thereby potentially preventing the need for later-stage heart failure devices, such as LVADs,
artificial hearts or transplants. It may also provide relief from the symptoms of Class III and ambulatory Class IV heart failure and improve quality of life and cardiac function. Based
on the patient results from our feasibility trial, we also believe that some patients treated with our C-Pulse System will be able to stop using the device due to sustained improvement in
their conditions as a result of the therapy.

Once
implanted, the C-Pulse cuff is positioned on the outside of the patient's ascending aorta above the aortic valve. An electrocardiogram sensing lead is then attached to
the heart to determine timing for cuff inflation and deflation in synchronization with the heartbeat. As the heart fills with blood, the C-Pulse cuff inflates to push blood from the aorta
to the rest of the body and to the heart muscle via the coronary arteries. Just before the heart pumps, the C-Pulse cuff deflates to reduce the heart's workload through pressure changes,
allowing the heart to pump with less effort. The
C-Pulse cuff and electrical leads are connected to a single line that is run through the abdominal wall to connect to a power driver outside the body. The system's driver and battery
source are contained inside a carrying bag.

Surgeons
in the feasibility phase of our clinical trial initially implanted the C-Pulse System in patients via a full sternotomy. We have developed a procedure to allow the
C-Pulse System to be implanted via a small pacemaker-like incision between the patient's ribs and sternum, rather than through a full sternotomy, and the first implant using
this less invasive procedure was completed in 2010. Patients implanted via our minimally invasive procedure typically require a hospital stay of four to seven days in connection with implantation of
the C-Pulse System, after which they return home. This compares to an average hospital stay of 14 days for patients implanted with the C-Pulse System via a full
sternotomy. Further, final clinical data from two LVAD studies indicate median hospital stays of 19 and 25 days for patients implanted via a full sternotomy. Therefore, we believe this less
invasive approach can reduce procedural time, hospital stays, overall cost and patient risk as compared to treatment options that require a full sternotomy.

The
C-Pulse System distinguishes itself from other mechanical heart failure therapies in two important respects, which we believe differentiate our system from other products
addressing moderate to severe heart failure patients:



The C-Pulse System is Placed Outside a Patient's Vascular
System. The C-Pulse cuff is placed outside a patient's ascending aorta and assists the heart's normal pumping function,
rather than being inserted into the vascular system and replacing heart function in a manner similar to other devices such as LVADs. Because the C-Pulse System remains outside the vascular
system, there is potentially less risk of complications such as blood clots, stroke and thrombosis in comparison to other mechanical devices that reside or function inside the vascular system. Because
it rests outside the vasculature, it also does not require blood thinning agents that are necessary for patients with devices that are in contact with the bloodstream. As with any implanted device,
patients using our system have a risk of infection from the implantation procedure, and any untreated sternal infection arising from the implantation procedure or otherwise could result in erosion of
the aortic wall or an aortic rupture in connection with using our system. Because our system has been implanted in a limited number of patients to date, the potential competitive disadvantages and
risks associated with the use of our system are not fully known at this time.



The C-Pulse System Can be Safely Turned On or Off at Any
Time. The C-Pulse System does not need to be in constant operation for patients once implanted, and the device can be safely
turned on or off at any time. This feature allows patients intervals of freedom to perform certain activities such as showering. Patients are not required to visit a medical facility when turning our

device
on or off or using the device. However, patients are advised to turn off the C-Pulse System only for short periods of time and for specified activities to maximize the benefit from
the system. If the C-Pulse System is not used as directed, patients might experience a return of their heart failure symptoms, a loss of any improvement in their condition resulting from
use of our system or an overall worsening of their heart failure symptoms compared to when they began using our system.

Clinical Development

We completed enrollment and implantation of 20 patients in our North American feasibility trial in the first half of 2011. The
feasibility phase of our clinical trial was primarily designed to assess safety and provide indications of performance of the C-Pulse System in moderate to severe heart failure patients
who suffer from symptoms such as shortness of breath and reduced mobility. In November 2011, we announced the preliminary results of the six-month follow-up period for the
feasibility study and we submitted the clinical data to the FDA. A summary of the results from the six-month follow-up data as well as the twelve-month data, which became
available in June 2012, can be found under "BusinessClinical Development" beginning on page 46 of this prospectus.

We
believe the results of the six-month and 12-month follow-up demonstrate the feasibility of the C-Pulse System implantation procedure and provide
indications of safety and efficacy of the C-Pulse System in patients with moderate to severe heart failure necessary to proceed with a pivotal trial. In March 2012, the FDA notified
us that it completed its review of the C-Pulse System feasibility trial data, concluded we met the applicable agency requirements, and indicated that we can move forward with an IDE
application. We currently anticipate that
we will have pivotal trial IDE approval in 2012, begin enrollment promptly thereafter, and complete our pivotal trial enrollment by the end of 2015. In July 2012, we obtained CE Mark approval for the
C-Pulse System and completed a two-year follow-up for a patient implanted with our system during our feasibility trial.

Corporate Information

Sunshine Heart, Inc. was incorporated in Delaware on August 22, 2002. We began operating our business in November 1999 through
Sunshine Heart Company Pty Ltd., which currently is a wholly owned Australian subsidiary of Sunshine Heart, Inc. Since September 2004, Chess Depositary Instruments, or CDIs, representing
beneficial ownership of our common stock have been have traded on the Australian Securities Exchange, or ASX, under the symbol "SHC". Historically, each CDI represented one share of our common stock.
In connection with the 200 for 1 reverse stock split we affected on January 27, 2012, we changed this ratio so that each CDI represents 1/200th of a share of our common stock.

On
September 30, 2011, we filed a Form 10 registration statement with the SEC, which was declared effective on February 14, 2012. The Form 10 registered our
common stock under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our common stock began trading on the Nasdaq Capital Market on February 16, 2012.

Our
principal executive offices are located at 12988 Valley View Road, Eden Prairie, Minnesota 55344, and our telephone number is (952) 345-4200. Our website address
is www.sunshineheart.com. The information on, or that may be accessed through, our website is not incorporated by reference into and should not be
considered a part of this prospectus or the registration statement of which it is a part.

We
qualify as an "emerging growth company" as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified
reduced reporting

and
other burdens that are otherwise applicable generally to U.S. public companies. These provisions include:



a requirement to have only two years of audited financial statements and only two years of related Management's Discussion
and Analysis of Financial Condition and Results of Operations disclosure; and



an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting
pursuant to the Sarbanes-Oxley Act of 2002.

We
may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if
we have more than $1.0 billion in annual revenue, have more than $700 million in market value of our shares of common stock held by non-affiliates, or issue more than
$1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens. The JOBS Act permits
emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to U.S. public companies. We have elected to take advantage
of the benefits of this extended transition period, and as a result of this election, our financial statements may not be comparable to those of companies that comply with new or revised accounting
standards for U.S. public companies.

We have granted the underwriters an option to purchase up to an additional 375,000 shares of common stock within 30 days of the date of this prospectus in order to cover over-allotments, if
any.

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts and offering expenses, will be approximately $22,548,250. We intend to use approximately
$300,000 of the net proceeds from this offering to repay outstanding indebtedness owed to our outside legal counsel (see "Legal Matters") and the remainder of the net proceeds to fund our pivotal clinical trial and for general corporate purposes.
General corporate purposes may include providing working capital and funding capital expenditures and research and development. See "Use of Proceeds."

In addition, if the purchasers under our securities purchase agreement dated February 6, 2012 elect to purchase all shares we must offer them pursuant to that agreement, we would issue in the
future pursuant to a separate registration statement, an additional 833,333 shares of our common stock and generate additional estimated net proceeds of $7.8 million, assuming the number of shares we offer as set forth on the cover of this
prospectus remains the same. We intend to use any proceeds from sales of any additional shares pursuant to the February 2012 securities purchase agreement to fund our pivotal clinical trial and for general corporate purposes. We cannot determine at
this time how many shares, if any, the purchasers under the February 2012 securities purchase agreement will purchase pursuant to their preemptive rights thereunder.

Nasdaq Capital Market symbol

SSH

The
number of shares of our common stock outstanding after this offering is based on 6,277,538 shares outstanding as of July 20, 2012. The number of shares of our common stock
outstanding as of that date excludes (a) 892,642 shares of common stock issuable upon the exercise of outstanding options to purchase our common stock at a weighted average exercise price of
$10.05 per share, (b) 1,564,649 shares of common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of A$7.49 per share (approximately $7.66 per share
based on a conversion rate of A$1 to $1.0231) and (c) 123,820 shares of common stock reserved for future grants under our Amended and Restated 2011 Equity Incentive Plan, or 2011 Equity
Incentive Plan.

Our business faces many risks. We believe the risks described below are the material risks we face. However,
the risks described below may not be the only risks we face. Additional unknown risks or risks that we currently consider immaterial may also impair our business operations. If any of the events or
circumstances described below actually occurs, our business, financial condition or results of operations could suffer, and the trading price of our shares of common stock could decline significantly.
Investors should consider the specific risk factors discussed below, together with the "Special Note Regarding Forward-Looking Statements" and the other information contained this
prospectus.

Risks Relating to Our Business

We have incurred operating losses since our inception and anticipate that we will continue to incur operating losses for the foreseeable future.

We are an early-stage company with a history of incurring net losses. We have incurred net losses since our inception, including net
losses of $16.2 million and $7.6 million for the years ended December 31, 2011 and 2010, respectively, and $6.7 million for the six months ended June 30, 2012. As of
June 30, 2012, our accumulated deficit was $71.9 million. We do not have any products that have been approved for marketing in the United States, we have not established any sales
capability outside of the United States, and we continue to incur research and development and general and administrative expenses related to our operations. We expect to continue to incur significant
and increasing operating losses for the foreseeable future as we incur costs associated with the conduct of clinical trials, continue our research and development programs, seek regulatory approvals,
expand our sales and marketing capabilities, increase manufacturing of our system and comply with the requirements related to being a U.S. public company listed on the ASX and the Nasdaq Capital
Market. To become and remain profitable, we must succeed in developing and commercializing products with significant market potential. This will require us to succeed in a range of challenging
activities, including conducting clinical trials, obtaining regulatory approvals, manufacturing products and marketing and selling commercial products. There can be no assurance that we will succeed
in these activities, and we may never generate revenues sufficient to achieve profitability. If we do achieve profitability, we may not be able to sustain it.

We will need additional funding to continue operations, which may not be available to us on favorable terms or at all.

We have no products currently available for commercial sale, and to date we have generated only limited revenue from our feasibility
study. In addition, the report of our independent registered public accounting firm includes an explanatory paragraph with regard to our ability to continue as a going concern in connection with its
audit of our financial statements for the fiscal year ended December 31, 2011. After completion of this offering, we expect to continue to incur significant and increasing operating losses for
the foreseeable future as we incur costs associated with the conduct of clinical trials, continue our research and development programs, seek regulatory approvals, expand our sales and marketing
capabilities, increase manufacturing of our system and comply with the requirements related to being a U.S. public company listed on the ASX and the Nasdaq Capital Market. Additional funding will
likely be needed after completion of this offering and may not be available on terms favorable to us, or at all. If we raise additional funding through the issuance of equity securities, our
stockholders may suffer dilution and our ability to use our net operating losses to offset future income may be limited. If we raise additional funding through debt financing, we may be required to
accept terms that restrict our ability to incur additional indebtedness, require us to use our cash to make payments under such indebtedness, force us to maintain specified liquidity or other ratios
or restrict our ability to pay dividends or make acquisitions. If we are unable to secure additional funding, our development programs and our commercialization efforts would be delayed,

reduced
or eliminated, our relationships with our suppliers and manufacturers may be harmed, and we may not be able to continue our operations.

Our near-term prospects are highly dependent on the development of a single product, our C-Pulse System. If we fail to obtain the regulatory
approvals necessary to sell the C-Pulse System or fail to successfully commercialize this system, our business and prospects would be harmed significantly.

Our near-term prospects are highly dependent on the development of a single product, our C-Pulse System, and we
have no other product candidates in active development at this time. We are in the process of pursuing regulatory approvals necessary to sell our system in the United States. We completed enrollment
of our North American feasibility clinical trial in the first half of 2011. In November 2011, we announced the preliminary results of the six-month follow-up period for the
feasibility study and we submitted the clinical data to the FDA. In March 2012, the FDA notified us that it completed its review of the C-Pulse System feasibility trial data, concluded we
met the applicable agency requirements, and indicated that we can move forward with an IDE application. We expect to submit an IDE application to the FDA in the second half of 2012 for approval to
initiate our pivotal trial. We expect to complete enrollment of our pivotal trial by the end of 2015 and do not anticipate marketing our system in the United States before 2017.

There
can be no assurance that we will be able to obtain the regulatory approvals necessary to sell our system. In addition, even if we obtain such regulatory approvals, there can be no
assurance that we will be able to successfully commercialize our system. If we fail to obtain the regulatory approvals necessary to sell our system or fail to successfully commercialize our system,
our business and prospects would be harmed significantly.

We currently have no sales, marketing or distribution operations and will need to expand our expertise in these areas.

We currently have no sales, marketing or distribution operations and, in connection with the expected commercialization of our system,
will need to expand our expertise in these areas. To increase internal sales, distribution and marketing expertise and be able to conduct these operations, we would have to invest significant amounts
of financial and management resources. In
developing these functions ourselves, we could face a number of risks, including:



we may not be able to attract and build an effective marketing or sales force;



the cost of establishing, training and providing regulatory oversight for a marketing or sales force may be substantial;
and



there are significant legal and regulatory risks in medical device marketing and sales that we have never faced, and any
failure to comply with applicable legal and regulatory requirements for sales, marketing and distribution could result in an enforcement action by the FDA, European regulators or other authorities
that could jeopardize our ability to market the system or could subject us to substantial liability.

We plan to commercialize our system outside of the United States, which will expose us to risks associated with international operations.

We plan to commercialize our system outside of the United States and expect to commence clinical trials in certain European countries
in addition to the United States. Conducting international operations subjects us to risks, including:



costs of complying with varying regulatory requirements and potential, unexpected changes to those requirements;

the burdens of complying with a wide variety of non-U.S. laws and legal standards;



increased financial accounting and reporting burdens and complexities; and



reduced or varied protection for intellectual property rights in some countries.

The
occurrence of any one of these risks could negatively affect our international operations. Additionally, operating in international markets also requires significant management
attention and financial resources. We cannot be certain that our operations in other countries will produce desired levels of revenues or profitability.

We depend on a limited number of manufacturers and suppliers of various critical components for our C-Pulse System. The loss of any of these manufacturer or
supplier relationships could delay future clinical trials or prevent or delay commercialization of our C-Pulse System.

We rely entirely on third parties to manufacture our C-Pulse System and to supply us with all of the critical components of
our C-Pulse System, including the balloon, driver, cuff and interface lead. We primarily purchase our components and products on a purchase order basis and do not "second source" any
components of our system. If one or more of the suppliers of the components used in our system were unable or unwilling to meet our demand for such components or faced financial or business
difficulties in general, or if the components or finished products provided by any of our suppliers do not meet quality and other specifications, clinical trials or commercialization of our system
could be delayed and our expenses could increase. Moreover, if any of the suppliers were unable or unwilling to perform, we would be required to find alternative sources for the components provided by
such supplier, and there can be no assurance that we would be able to find a replacement supplier on a timely basis, or at all. In particular, the balloon used in our system is highly specialized and
is currently solely available from a single supplier. If the manufacturer of the balloon were unable or unwilling to supply this component for any reason, we would have to locate and qualify another
supplier and such supplier and its balloon product would have to be qualified with the FDA. Since there is currently no other supplier in the industry, locating and qualifying another supplier could
cause significant production delays, causing us to lose revenues and market share and to potentially suffer increased costs and damage to our reputation. Additionally, even if we are able to find a
replacement supplier of any of the components used in our system, we may face additional regulatory delays, and the manufacture and delivery of our C-Pulse System could be interrupted for
an extended period of time and become significantly more expensive. This could delay completion of future clinical trials or commercialization of our C-Pulse System and adversely affect
our results of operations. In addition, we may be required to use different suppliers or components to obtain regulatory approval from the FDA.

If our manufacturers or our suppliers are unable to provide an adequate supply of our system following the start of commercialization, our growth could be limited and our
business could be harmed.

In order to produce our C-Pulse System in the quantities that we anticipate will be required to meet market demand, we will
need our manufacturers to increase, or scale-up, the production process by a significant factor over the current level of production.
There are technical challenges to scaling-up manufacturing capacity and developing commercial-scale manufacturing facilities that may require the

investment
of substantial additional funds by our manufacturers and hiring and retaining additional management and technical personnel who have the necessary manufacturing experience. If our
manufacturers are unable to do so, we may not be able to meet the requirements for the launch of the system or to meet future demand, if at all. We also may represent only a small portion of our
supplier's or manufacturer's business, and if they become capacity constrained they may choose to allocate their available resources to other customers that represent a larger portion of their
business. We currently anticipate that we will continue to rely on third-party manufacturers and suppliers for the production of our C-Pulse System following commercialization. If we
develop and obtain regulatory approval for our system and are unable to obtain a sufficient supply of our system, our revenue, business and financial prospects would be adversely affected.

If we are unable to manage our expected growth, we may not be able to commercialize our system.

We have expanded, and expect to continue to expand, our operations and grow our research and development, product development,
regulatory, manufacturing, sales, marketing and administrative operations. This expansion has placed, and is expected to continue to place, a significant strain on our management and operational and
financial resources. To manage any further growth and to commercialize our system, we will be required to improve existing and implement new operational and financial systems, procedures and controls
and expand, train and manage our growing employee base. In addition, we will need to manage relationships with various manufacturers, suppliers and other organizations. Our ability to manage our
operations and growth will require us to improve our operational, financial and management controls, as well as our internal reporting systems and controls. We may not be able to implement such
improvements to our management information and internal control systems in an efficient and timely manner and may discover deficiencies in existing systems and controls. Our failure to accomplish any
of these tasks could materially harm our business.

We may not be able to correctly estimate or control our future operating expenses, which could lead to cash shortfalls.

Our operating expenses may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our
control. These factors include:



the time and resources required to develop, conduct clinical studies and obtain regulatory approvals for the products we
develop;



the expenses we incur for the research and development required to maintain and improve our system;



the costs of preparing, filing, prosecuting, defending and enforcing patent claims and other patent related costs,
including litigation costs and the results of such litigation;



the expenses we incur in connection with commercialization activities, including marketing, sales and distribution;



our sales strategy and whether the revenues from sales of our system will be sufficient to offset our expenses;



the costs to attract and retain personnel with the skills required for effective operations; and



the costs associated with being a public company.

Our
budgeted expense levels are based in part on our expectations concerning future revenues from sales of our C-Pulse System. We may be unable to reduce our expenditures in
a timely manner to compensate for any unexpected shortfall in revenue. Accordingly, a significant shortfall in demand for our system could have an immediate and material impact on our business and
financial condition.

We compete against many companies, some of which have longer operating histories, more established products and greater resources than we do, which may prevent us from
achieving further market penetration or improving operating results.

Competition from medical device companies and medical device divisions of health care companies, as well as pharmaceutical companies
and gene- and cell-based therapies is intense and is expected to increase. Our system will compete against therapies, including pharmacological therapies, as well as other
medical device competitors that treat or may treat in the future Class III or ambulatory Class IV heart failure patients, including AbioMed, Inc., Berlin Heart GmbH,
CardioKinetix, Inc., CircuLite, Inc., HeartWare International Inc., Jarvik Heart, Inc., MicroMed Technology, Inc., SynCardia Systems, Inc., Terumo
Heart, Inc. and Thoratec Corporation, as well as a range of other specialized medical device companies with devices at varying stages of development. Some of these competitors have
significantly greater financial and human resources than we do and have established reputations, as well as worldwide distribution channels and sales and marketing capabilities that are larger and
more established than ours. Additional competitors may enter the market, and we are likely to compete with new companies in the future. We also face competition from other medical therapies which may
focus on our target market as well as competition from manufacturers of pharmaceutical and other devices that have not yet been developed. Competition from these companies could harm our business. In
addition, because our system has been implanted in a limited number of patients to date, all of the material risks and potential competitive disadvantages of our system are not necessarily known at
this time.

Our
ability to compete effectively depends upon our ability to distinguish our company and our system from our competitors and their products. Factors affecting our competitive position
include:



financial resources;



product performance and design;



product safety;



acceptance of our system in the marketplace;



sales, marketing and distribution capabilities;



manufacturing and assembly costs;



pricing of our system and of our competitors' products;



the availability of reimbursement from government and private health insurers;



success and timing of new product development and introductions;



regulatory approvals in the United States; and



intellectual property protection.

The competition for qualified personnel is particularly intense in our industry. If we are unable to retain or hire key personnel, we may not be able to sustain or grow our
business.

Our ability to operate successfully and manage our potential future growth depends significantly upon our ability to attract, retain
and motivate highly skilled and qualified research, technical, clinical, regulatory, sales, marketing, managerial and financial personnel. We face intense competition for such personnel, and we may
not be able to attract, retain and motivate these individuals. We compete for talent with numerous companies, as well as universities and nonprofit research organizations. Our future success also
depends on the personal efforts and abilities of the principal members of our senior management and scientific staff to provide strategic direction, manage our operations and maintain a cohesive and
stable environment. We do not maintain key man life insurance on the lives of any of the members of our senior management. The loss

of
key personnel for any reason or our inability to hire, retain and motivate additional qualified personnel in the future could prevent us from sustaining or growing our business.

Product defects could harm our results of operations.

The design, manufacture and marketing of medical devices involve certain inherent risks. Manufacturing or design defects, unanticipated
use of a product or inadequate disclosure of risks relating to the use of the product can lead to injury or other adverse events. These events could lead to recalls or safety alerts relating to a
product (either voluntary or required by the FDA or similar governmental authorities in other countries), and could result, in certain cases, in the removal of a product from the market. Any recall of
our system could result in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our system. Personal injuries relating to the use of our system
could also result in product liability claims being brought against us. In some circumstances, such adverse events could also cause delays in new product approvals. Any one of these factors could
substantially harm our business and results of operations.

We may be sued for product liability, which could adversely affect our business.

The design, manufacture and marketing of medical devices carries a significant risk of product liability claims. Our system treats
Class III and ambulatory Class IV heart failure for patients who typically have serious medical issues. As a result, our exposure to product liability claims may be heightened because
the people who use our system have a high risk of suffering adverse outcomes, regardless of the safety or efficacy of our system. In addition, because our system has been implanted in a limited number
of patients to date, we cannot assure you that we are currently aware of all material risks related to use of our system or that could lead to product liability claims against us.

We
may be held liable if any product we develop and commercialize causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or consumer use.
The safety studies we must perform and the regulatory approvals required to commercialize our system will not protect us from any such liability. We carry product liability insurance with a
$10 million aggregate limit. However, if there are product liability claims against us, our insurance may be insufficient to cover the expense of defending against such claims, or may be
insufficient to pay or settle such claims. Furthermore, we may be unable to obtain adequate product liability insurance coverage for commercial sales of any of our approved products. If such insurance
is insufficient to protect us, our results of operations will be harmed. If any product liability claim is made against us, our reputation and future sales will be damaged, even if we have adequate
insurance coverage. Even if a product liability claim against us is without merit or if we are not found liable for any damages, a product liability claim could result in decreased demand for our
system, injury to our reputation, diversion of management's attention from operating our business, withdrawal of clinical trial participants, significant costs of related litigation, loss of revenue
or the inability to commercialize the C-Pulse System.

Risks Relating to Regulation

We do not have FDA approval for our system and our success will depend heavily on the success of our pivotal trial for our C-Pulse System. Any failure or
significant delay in successfully completing our pivotal trial or obtaining regulatory approvals could harm our financial results and our prospects and require us to seek additional funding.

Upon completion of the six-month follow-up period for our feasibility trial, we submitted the trial's clinical
data to the FDA in November 2011. We expect to submit an IDE application to the FDA in the second half of 2012 for approval to initiate our pivotal trial. Completion of the pivotal trial could be
delayed, and adverse events during the trial could cause us to modify the existing design, repeat or terminate

the
trial. If the trial is delayed, if it must be repeated or if it is terminated, our costs associated with the trial will increase, and it will take us longer to obtain regulatory approvals and
commercialize the C-Pulse System, if we are able to do so at all. Our pivotal trial also may be suspended or terminated at any time by regulatory authorities or by us. FDA scrutiny of IDE
applications has intensified in recent years, increasing the risk of delay or failure.

If
we commence and complete our pivotal clinical trial, we must demonstrate the safety and efficacy of the C-Pulse System by meeting the trial's endpoints before we can
commercialize the C-Pulse System in the United States. Our inability to achieve the safety or efficacy endpoints in the pivotal trial could delay our timeline for obtaining regulatory
approval to commercialize our system or prevent us from obtaining such regulatory approval altogether.

In
addition to successfully completing our pivotal trial, we will need to receive approval from regulatory agencies in each country in which we seek to sell our system. Approval
procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval varies from country to country and
approval in one country does not ensure regulatory approval in another. In addition, a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in
others. We cannot assure you when, or if, we will be able to commence sales in any jurisdiction within or outside the United States.

If
we are unable to complete our pivotal trial, or experience significant delays in the trial, or if the results of the trial do not meet its safety and efficacy endpoints, our ability
to obtain regulatory approval to commercialize our system and to generate revenues will be harmed.

Even if we obtain foreign regulatory approvals, we will need to obtain FDA approval to commercialize our system in the United States.

Even if we obtain foreign regulatory approvals, we will need to obtain FDA approval to commercialize our system in the United States,
which will require us to receive FDA approval to conduct clinical trials in the United States and to complete those trials successfully. If we fail to obtain approval from the FDA, we will not be able
to market and sell our system in the United States. We do not currently have the necessary regulatory approvals to commercialize our C-Pulse System in the United States, which we believe
is the largest potential market for our C-Pulse System. We can offer no assurance that our IDE application will be approved, that our clinical trials will be successful or that we will
ever obtain FDA approval of the C-Pulse System or any future products.

In
order to obtain FDA approval for our C-Pulse System, we will be required to receive a Premarket Approval, or PMA, from the FDA. A PMA must be supported by
pre-clinical and clinical trials to demonstrate safety and efficacy. A clinical trial will be required to support an application for a PMA, and we will be seeking FDA approval of our IDE
application that will allow us to commence a clinical trial in the United States. We intend to commence our U.S. pivotal trial in 2012, but there can be no assurance that our U.S. pivotal trial will
begin or be completed on schedule or at all. Even if completed, we do not know if this trial will meet its objectives or end-points to show the safety and efficacy of our system so as to
support an application for a PMA.

The
process of obtaining a PMA from the FDA for our C-Pulse System, or any future products or enhancements or modifications to any products, could:

result in failure to support approval of the product or limitations on the indicated uses of the product.

Increased
attention to safety and oversight issues in light of recent, widely publicized events concerning the safety of certain food, drug and medical device products could cause the
FDA to take a more cautious approach in connection with approvals for devices such as ours, which could delay or prevent FDA approval of our C-Pulse System.

There
can be no assurance that we will receive the required approvals from the FDA or, if we do receive the required approvals, that we will receive them on a timely basis. The failure
to receive product approval by the FDA would significantly harm our business, financial condition or results of operations.

We may be unable to enroll and complete our planned U.S. pivotal trial for the C-Pulse System or other clinical trials, which could prevent or delay regulatory
approval of the C-Pulse System and impair our financial position.

We intend to commence our U.S. pivotal trial in 2012. The trial will be designed to be a randomized trial that includes approximately
380 patients and is expected to involve approximately 40 sites. Conducting a clinical trial of this size is a complex and uncertain process.

The
commencement of our trial could be delayed for a variety of reasons, including:

obtaining institutional review board approval to conduct the trial at a prospective site; and



obtaining sufficient patient enrollment, which is a function of many factors, including the size of the patient
population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the trial.

Once
the trial has begun, the completion of the trial, and our other ongoing clinical trials, could be delayed, suspended or terminated for several reasons,
including:



ongoing discussions with regulatory authorities regarding the scope or design of our preclinical results or clinical trial
or requests for supplemental information with respect to our preclinical results or clinical trial results;



our failure or inability to conduct the clinical trials in accordance with regulatory requirements;



sites currently participating in the trial may drop out of the trial, which may require us to engage new sites or petition
the FDA for an expansion of the number of sites that are permitted to be involved in the trial;



patients may not achieve the required clinical end-points of the trial;



patients may not remain in or complete clinical trials at the rates we expect;



patients may experience serious adverse events or side effects during the trial, which, whether or not related to our
system, could cause the FDA or other regulatory authorities to place the clinical trial on hold; and



clinical investigators may not perform clinical trials on our anticipated schedule or consistent with the clinical trial
protocol and good clinical practice requirements.

If
our pivotal trial is delayed, it will take us longer to ultimately commercialize a product or the delay could result in our being unable to do so. Our development costs will also
increase if we have material delays in our pivotal trial or if we need to perform more or larger clinical trials than planned. Moreover, there can be no assurance that we will be able to successfully
complete, or achieve the desired clinical end-points from, our pivotal trial at all, which could prevent us from receiving regulatory approval for the C-Pulse System
altogether. Any of the foregoing could harm our financial results and our prospects and cause us to seek additional funding.

We depend on clinical investigators and clinical sites to enroll patients in our clinical trials, and on other third parties to manage the trials and to perform related data
collection and analysis, and, as a result, we may face costs and delays that are outside of our control.

We have and plan to continue to rely on clinical investigators and clinical sites to enroll patients in our clinical trials, including
our planned U.S. pivotal trial, and other third parties to manage the trials and to perform related data collection and analysis. However, we have limited oversight over these entities and cannot
control the amount and timing of resources that clinical sites may devote to
our clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials, to ensure compliance by patients with clinical protocols
or comply with regulatory requirements, we will be unable to complete these trials, which could prevent us from obtaining regulatory approvals for our system. Our agreements with clinical
investigators and clinical trial sites for clinical testing place substantial responsibilities on these parties and, if these parties fail to perform as expected, our trials could be delayed or
terminated. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or
accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended,
delayed or terminated, or the clinical data may be rejected by the FDA, and we may be unable to obtain regulatory approval for, or successfully commercialize, our system.

Even if our system receives marketing approval, product approvals by the FDA can be withdrawn due to failure to comply with regulatory
standards. We rely entirely on third parties to manufacture our C-Pulse System and those manufacturers are required to demonstrate and maintain compliance with the FDA's Quality System
Regulation, or QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and
shipping of our system. The FDA enforces the QSR through periodic unannounced inspections. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored
through periodic inspections by the FDA. A failure by our manufacturers to comply with the QSR or to take satisfactory corrective action in response to an adverse QSR inspection could cause a
significant delay in our ability to have our system manufactured and to complete our clinical trials and could significantly increase our costs, which would harm our financial results and our
prospects. In addition, suppliers of components of, and products used to manufacture, our system must also comply with FDA and foreign regulatory requirements, which often require significant time,
money and record-keeping and quality assurance efforts and subject us and our suppliers to potential regulatory inspections and stoppages.

We plan to operate in multiple regulatory environments that require costly and time consuming approvals.

Even if we obtain regulatory approvals to commercialize the C-Pulse System or any other product that we may develop, sales
of our system in other jurisdictions will be subject to regulatory requirements that vary from country to country. The time and cost required to obtain approvals from these countries may be

longer
or shorter than that required for FDA approval, and requirements for licensing may differ from those of the FDA. Laws and regulations regarding the manufacture and sale of our system are
subject to future changes, as are administrative interpretations and policies of regulatory agencies. If we fail to comply with applicable foreign, federal, state or local market laws or regulations
or administrative interpretations and policies of regulatory agencies, we could be precluded from commercializing our system in those countries and could become subject to enforcement actions.
Enforcement actions could include product seizures, recalls, withdrawal of clearances or approvals and civil and criminal penalties, which in each case would harm our business.

The C-Pulse System may never achieve market acceptance even if we obtain regulatory approvals.

Even if we obtain regulatory approvals to commercialize the C-Pulse System or any other product that we may develop, our
products may not gain market acceptance among physicians, patients, third-party health care payors or the medical community. The degree of market acceptance of any of the devices that we may develop
will depend on a number of factors, including:



the perceived effectiveness and price of the product;



the prevalence and severity of any side effects;



potential advantages over alternative treatments;



the strength of marketing and distribution support; and



sufficient third-party coverage or reimbursement.

If
our C-Pulse System, or any other product that we may develop, is approved but does not achieve an adequate level of acceptance by physicians, patients, third-party health
care payors and the medical community, we may not generate product revenue and we may not become profitable or be able to sustain profitability.

If we fail to obtain an adequate level of reimbursement for our system by third-party payors, there may be no commercially viable markets for our system or the markets may
be much smaller than expected.

The availability and levels of reimbursement by governmental and other third-party payors significantly affect the market for our
system. Reimbursement by third-party payors in the United States typically is based on the device's perceived benefit and whether it is deemed medically reasonable and necessary. Reimbursement levels
of third-party payors in the United States are also based on established payment formulas that take into account part or all of the cost associated with these devices and the related procedures
performed. We cannot assure you the level of reimbursement we might obtain in the United States, if any, for our system. If we do not obtain adequate levels of reimbursement for our system by
third-party payors in the United States, which we believe is largest potential market for our system, our financial condition, results of operations and prospects would be harmed.

Reimbursement
and health care payment systems in international markets vary significantly by country, and include both government-sponsored health care and private insurance. To obtain
reimbursement or pricing approval in some countries, we may be required to produce additional clinical data, which may involve one or more additional clinical trials, that compares the
cost-effectiveness of our system to other available therapies. We may not obtain international reimbursement or pricing approvals in a timely manner, if at all. Our failure to receive
international reimbursement or pricing approvals would negatively impact market acceptance of our system in the international markets in which those approvals are sought.

We believe that future reimbursement may be subject to increased restrictions both in the United States and in international markets. Future legislation,
regulation or reimbursement policies of third-party payors may adversely affect the demand for the C-Pulse System and limit our ability to sell the C-Pulse System or any future
products on a profitable basis. In addition, third-party payors continually attempt to contain or reduce the costs of health care by challenging the prices charged for health care products and
services. If reimbursement for our system is unavailable in any market or limited in scope or amount, or if pricing is set at unsatisfactory levels, market acceptance of our system would be
significantly impaired and our future revenues, if any, would be significantly harmed.

We may be subject, directly or indirectly, to U.S. federal and state health care fraud and abuse and false claims laws and regulations. Prosecutions under such laws have
increased in recent years and we may become subject to such litigation. If we are unable to, or have not fully complied with such laws, we could face substantial penalties.

If we are successful in achieving regulatory approval to market our C-Pulse System, our operations will be directly, or
indirectly through our customers and health care professionals, subject to various U.S. federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback
Statute, federal False Claims Act, and federal Foreign Corrupt Practices Act, or the FCPA. These laws may impact, among other things, our proposed sales, and marketing and education programs.

The
federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in
exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal health care program such as the
Medicare and Medicaid programs. Several courts have interpreted the statute's intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of
federal health care covered business, the statute has been violated. The Anti-Kickback Statute is broad and, despite a series of narrow safe harbors, prohibits many arrangements and
practices that are lawful in businesses outside of the health care industry. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil and
administrative sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal health care programs. An alleged violation of the Anti-Kickback Statute may be
used as a predicate offense to establish liability pursuant to other federal laws and regulations such as the federal False Claims Act. Many states have also adopted laws similar to the federal
Anti-Kickback Statute, some of which apply to the referral of patients for health care items or services reimbursed by any source, not only the Medicare and Medicaid programs.

The
federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from, the federal
government. Suits filed under the False Claims Act, known as "qui tam" actions, can be brought by any individual on behalf of the government and such
individuals, commonly known as "relators" or "whistleblowers," may share in any amounts paid by the entity to the government in fines or settlement. The frequency of filing qui tam actions has
increased significantly in recent years, causing greater numbers of medical device, pharmaceutical and health care companies to have to defend a False Claim Act action. The federal Patient Protection
and Affordable Care Act includes provisions expanding the ability of certain relators to bring actions that would have been previously dismissed under prior law. When an entity is determined to have
violated the federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. The Deficit
Reduction Act of 2005 encouraged states to enact or modify their state false claims act to be at least as effective as the federal False Claims Act by granting states a portion of any federal Medicaid
funds recovered through Medicaid-related actions. Most states have enacted state false claims laws, and many of those states included laws including qui
tam provisions. States have until March 31, 2013 to enact or amend their false claims laws

modeled
after the federal False Claims Act for review and approval to receive a greater portion of any recovery.

The
federal Patient Protection and Affordable Care Act includes provisions known as the Physician Payments Sunshine Act, which requires manufacturers of drugs, biologics, devices and
medical supplies
covered under Medicare and Medicaid starting in 2012 to record any transfers of value to physicians and teaching hospitals and to report this data beginning in 2013 to the Centers for Medicare and
Medicaid Services for subsequent public disclosure. Manufacturers must also disclose investment interests held by physicians and their family members. Failure to submit the required information may
result in civil monetary penalties of up to $1 million per year for knowing violations and may result in liability under other federal laws or regulations. Similar reporting requirements have
also been enacted on the state level in the United States, and an increasing number of countries worldwide either have adopted or are considering similar laws requiring transparency of interactions
with health care professionals. In addition, some states such as Massachusetts and Vermont impose an outright ban on certain gifts to physicians. If we receive FDA clearance to market our system in
the United States, these laws could affect our promotional activities by limiting the kinds of interactions we could have with hospitals, physicians or other potential purchasers or users of our
system. Both the disclosure laws and gift bans will impose administrative, cost and compliance burdens on us.

We
are unable to predict whether we could be subject to actions under any of these laws, or the impact of such actions. If we are found to be in violation of any of the laws described
above and other applicable state and federal fraud and abuse laws, we may be subject to penalties, including civil and criminal penalties, damages, fines, or an administrative action of suspension or
exclusion from government health care reimbursement programs and the curtailment or restructuring of our operations.

In
addition, to the extent we commence commercial operations overseas, we will be subject to the FCPA and other countries' anti-corruption/anti-bribery regimes,
such as the U.K. Bribery Act. The FCPA prohibits improper payments or offers of payments to foreign governments and their officials for the purpose of obtaining or retaining business. Safeguards we
implement to discourage improper payments or offers of payments by our employees, consultants, sales agents or distributors may be ineffective, and violations of the FCPA and similar laws may result
in severe criminal or civil sanctions, or other liabilities or proceedings against us, any of which would likely harm our reputation, business, financial condition and result of operations.

Risks Relating to our Intellectual Property

We may not be able to protect our intellectual property rights effectively, which could have an adverse effect on our business, financial condition or results of operations.

Our success depends in part on our ability to obtain and maintain protection in the United States and other countries of the
intellectual property relating to or incorporated into our
technology and system. As of June 30, 2012, we owned 12 issued patents in the United States and 8 patent applications in the United States, as well as 23 issued patents and 15 patent
applications in foreign jurisdictions. We estimate that the U.S. patents expire between approximately 2020 and 2024. Our pending and future patent applications may not issue as patents or, if issued,
may not issue in a form that will provide us any competitive advantage. Even if issued, existing or future patents may be challenged, narrowed, invalidated or circumvented, which could limit our
ability to stop competitors from marketing similar products or limit the length of terms of patent protection we may have for our system. Changes in patent laws or their interpretation in the United
States and other countries could also diminish the value of our intellectual property or narrow the scope of our patent protection. In addition, the legal systems of certain countries do not favor the
aggressive enforcement of patents, and the laws of foreign countries may not protect our rights to the same extent as

the
laws of the United States. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. In order to
preserve and enforce our patent and other intellectual property rights, we may need to make claims or file lawsuits against third parties. This can entail significant costs to us and divert our
management's attention from developing and commercializing our system.

Intellectual property litigation could be costly and disruptive to us.

In recent years, there has been significant litigation involving medical device patents and other intellectual property rights. From
time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies used in our business. Any claims, with or without merit, could be
time-consuming, result in costly litigation, divert the efforts of our technical and management personnel or require us to pay substantial damages. If we are unsuccessful in defending
ourselves against these types of claims, we may be required to do one or more of the following:

attempt to obtain a license to sell or use the relevant technology or substitute technology, which license may not be
available on reasonable terms or at all; or



redesign our system.

In
the event a claim against us was successful and we could not obtain a license to the relevant technology on acceptable terms or license a substitute technology or redesign our system
to avoid infringement, our business would be significantly harmed.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and system could be adversely affected.

In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and
know-how. We generally seek to protect this information by confidentiality agreements with our employees, consultants, scientific advisors and third parties. These agreements may be
breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. To the extent that our
employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

Our system could infringe patent rights of others, which may require costly litigation and, if we are not successful, could cause us to pay substantial damages or limit our
ability to commercialize our system.

Our commercial success depends on our ability to develop, manufacture and market our system and technology without infringing the
patents and other proprietary rights of third parties. As our industry expands and more patents are issued, the risk increases that there may be patents issued to third parties that relate to our
system and technologies of which we are not aware or that we must challenge to continue our operations as currently contemplated. Our system may infringe or may be alleged to infringe these patents.

In
addition, some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign
jurisdictions are typically not published until eighteen months after filing and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others
have not filed patent applications for technology covered by our issued patents or our pending applications or that we were the first to invent the technology. Another party may have filed, and may in
the future file, patent applications covering our system or technology similar to ours. Any such patent application may have priority over our patent applications or patents, which could further
require us to obtain rights to issued patents covering such technologies. If

another
party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the U.S. Patent and Trademark Office to determine
priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if the other party had independently arrived
at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions.

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

As is common in our industry, we employ individuals who were previously employed at other medical device companies, including our
competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees, or we, have used or disclosed trade secrets or other
proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in
substantial costs and be a distraction to management.

Risk Factors Related to Ownership of Our Common Stock and This Offering

An active trading market for our shares of common stock in the United States may not develop.

Our common stock has been listed for trading on the Nasdaq Capital Market only since February 16, 2012 and has experienced
limited trading volume. Our common stock has been listed on the ASX in the form of CDIs since 2004 and has also experienced limited trading volume on that exchange. The average daily trading volume in
our common stock on the Nasdaq Capital Market for the three-month period ended June 30, 2012 was approximately 950 shares, and for the period from July 1, 2012 to July 27, 2012,
was approximately 557,326 shares. The reported average daily trading volume in our common stock on the ASX for the three-month period ended June 30, 2012, was approximately 430,591 CDIs
(equivalent to approximately 2,513 shares), and for the period from July 1, 2012 to July 27, 2012, was approximately 2,683,738 CDIs (equivalent to approximately 13,419 shares). There can
be no assurance that an active public market for our shares will continue to develop in the United States. If an active trading market does not continue to develop in the United States, the market
price and liquidity of shares purchased in this offering would be adversely affected.

Future sales of our common stock could cause our stock price to decline.

If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could
decrease significantly. The perception in the public market that we or our stockholders might sell shares of our common stock or CDIs could also depress the market price of our common stock. 2,833,887
shares of our common stock that will be outstanding immediately after completion of this offering will become eligible for sale in the public markets from time to time, subject to restrictions under
the Securities Act of 1933 following the expiration of lock-up agreements entered into for the benefit of the underwriters by the holders of the common stock, including our directors and
executive officers. The underwriters may, in their sole discretion and at any time or from time to time, release all or any portion of the shares of common stock subject to the lock-up
agreements for sale in the public and private markets prior to the expiration of the lock-up. The market price for shares of our common stock may drop significantly when the restrictions
on resale by our existing stockholders lapse or if those restrictions on resale are waived. A decline in the price of shares of our common stock might impede our ability to raise capital through the
issuance of additional shares of our common stock or other equity securities.

In
addition, pursuant to the securities purchase agreement, dated February 6, 2012, by and among us and the purchasers party thereto, prior to offering any equity, equity based
and related securities, convertible

securities,
debt, preferred stock or purchase rights during the one-year period following the closing of the transactions contemplated by the agreement, or within 30 days after the
closing of any sale of these securities during that period, we must offer to issue to the purchasers under the securities purchase agreement, on the terms we are offering the securities to third
parties, an aggregate of 25% of the securities we are offering. This right could result in us selling securities to purchasers under the securities purchase agreement, including in connection with
this offering, at prices that are lower than the then-prevailing market price at the time of sale pursuant to the securities purchase agreement. This could result in dilution to our
existing stockholders, including stockholders who purchase shares in this offering, and cause the price of our common stock to decline.

We
also plan to file with the SEC registration statements on Form S-8 covering approximately 1 million shares of our common stock issuable under our equity
plans. Once registered with the SEC, these shares of common stock would be freely tradable in the United States when issued pursuant to our equity plans and the related award agreements. In addition,
we may sell additional shares of common stock in subsequent offerings to raise additional funding.

The price of our common stock may fluctuate significantly.

Our common stock has been traded on the Nasdaq Capital Market since February 16, 2012 and on the ASX in the form of CDIs since
2004. The price of our common stock has been, and is likely to continue to be, volatile, which means that it could decline substantially within a short period of time. For example, the per share price
of our common stock traded on the Nasdaq Capital Market ranged from $2.50 to $22.90 from February 16, 2012 to June 30, 2012, and from $2.75 to $17.25 for the period from July 1,
2012 to July 27, 2012. Our CDI closing price on the ASX ranged from A$0.020 (equivalent to approximately $4.09 per share using a conversion rate of A$1 to $1.0231) to A$0.055 (equivalent to
approximately $11.25 per share using a conversion rate of A$1 to $1.0231) for the 6 months ended June 30, 2012, and from A$0.021 (equivalent to approximately $4.30 per share using a
conversion rate of A$1 to $1.0231) to A$0.058 (equivalent to approximately $11.87 per share using a conversion rate of A$1 to $1.0231) for the period from July 1, 2012 to July 27, 2012.
The price of our common stock could fluctuate significantly for many reasons, including the following:

In
addition, stock markets in general and the market for shares of health care stocks in particular, have experienced extreme price and volume fluctuations in recent years, fluctuations
that frequently have been unrelated to the operating performance of the affected companies. These broad market fluctuations may adversely affect the market price of our common stock. The market price
of our common stock could decline below its current price and the market price of our shares may fluctuate significantly in the future. These fluctuations may be unrelated to our performance.

Our directors and executive officers hold substantial control over us and could limit your ability to influence the outcome of key transactions, including changes of
control.

As of July 20, 2012, our executive officers and directors and entities affiliated with them beneficially owned, in the aggregate
(including options or warrants exercisable currently or within 60 days of July 20, 2012), approximately 52.0% of our outstanding common stock. Our executive officers, directors and
affiliated entities, if acting together, would be able to control all matters requiring approval by our stockholders, including the election of directors and the approval of mergers, financings or
other significant corporate transactions. The concentration of ownership of our common stock may have the effect of delaying, preventing or deterring a change of control of our company, could deprive
our stockholders and CDI holders of an opportunity to receive a premium for their common stock and CDIs as part of a sale of our company and may affect the market price of our common stock and CDIs.
This significant concentration of stock ownership may adversely affect the trading price of our common stock and CDIs due to investors' perception that conflicts of interest may exist or arise.

Our ability to use U.S. net operating loss carryforwards or Australian tax losses might be limited.

As of December 31, 2011, we had U.S. net operating loss carryforwards of approximately $14.6 million for U.S. income tax
purposes, which expire in 2023 through 2031. To the extent
these net operating loss carryforwards are available, we intend to use them to reduce any corporate income tax liability associated with our operations we might have in the future. Section 382
of the U.S. Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that might be used to offset taxable income when a corporation has undergone
significant changes in stock ownership. As a result, prior or future changes in ownership could put limitations on the availability of our U.S. net operating loss carryforwards. In addition, our
ability to utilize the current net operating loss carryforwards might be further limited by the issuance of common stock in this offering or future offerings.

As
of December 31, 2011, we had tax losses in the Commonwealth of Australia of approximately $54.1 million. Continuing utilization of carry forward tax losses in Australia
may also be affected by the issuance of our common stock in this offering and in the future. This is because one test for carrying forward tax losses in Australia from year to year requires continuity
of ultimate ownership (subject to the relevant tests in the Australian tax law) of more than 50% between the loss year and the income year in which the loss is claimed.

To
the extent our use of our net operating loss carryforwards or tax losses is limited, our income could be subject to corporate income tax earlier than it would if we were able to use
net operating loss carryforwards, which could result in lower profits.

We may be subject to arbitrage risks.

Investors may seek to profit by exploiting the difference, if any, between the price of our CDIs on the ASX and the price of shares of
our common stock on the Nasdaq Capital Market. Such arbitrage activities could cause our share price in the market with the higher value to decrease to the price set by the market with the lower value
and could also lead to significant volatility in the price of our common stock.

We do not intend to pay cash dividends on our common stock in the foreseeable future.

We have never declared or paid any cash dividends on our common stock, and we currently do not anticipate paying any cash dividends in
the foreseeable future. We intend to retain any earnings to finance the development and expansion of our products and business. Accordingly, our stockholders and CDI holders will not realize a return
on their investment unless the trading price of our common stock and CDIs appreciate.

We will continue to incur increased costs as a result of being a U.S. reporting company and we have limited experience as a U.S. reporting company.

In connection with the effectiveness of our registration statement on Form 10, as of February 14, 2012, we became subject
to the periodic reporting requirements of the Exchange Act. Although we have been listed on the ASX for several years and have been required to file financial information and make certain other
filings with the ASX, our status as a U.S. reporting company under the Exchange Act has caused us to incur additional legal, accounting and other expenses that we did not previously incur, including
costs related to compliance with the requirements of the Sarbanes-Oxley Act of 2002 and the listing requirements of the Nasdaq Capital Market. We expect these rules and regulations will continue to
increase our legal and financial compliance costs and to make some activities more time-consuming and costly, and these activities may increase general and administrative expenses and
divert management's time and attention away from revenue-generating activities. We also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and
officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more
difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers.

Investors could lose confidence in our financial reports, and the value of our common stock may be adversely affected, if our internal controls over financial reporting are
found not to be effective by management or by an independent registered public accounting firm or if we make disclosure of existing or potential significant deficiencies or material weaknesses in
those controls.

In connection with becoming a company required to file reports with the SEC, we are required to comply with the internal control
evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Our independent registered public accounting firm will not be required to formally attest to the
effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC, or the
date we are no longer an "emerging growth company" as defined in the JOBS Act or a "smaller reporting company" as defined by applicable SEC rules.

We
continue to evaluate our existing internal controls over financial reporting against the standards adopted by the Public Company Accounting Oversight Board. During the course of our
ongoing evaluation of the internal controls, we may identify areas requiring improvement, and may have to design enhanced processes and controls to address issues identified through this review.
Remediating any deficiencies, significant deficiencies or material weaknesses that we or our independent registered public accounting firm may identify may require us to incur significant costs and
expend significant time and management resources. We cannot assure you that any of the measures we implement to remedy any such deficiencies will effectively mitigate or remedy such deficiencies. The
existence of one or more material weaknesses could affect the accuracy and timing of our financial reporting. Investors could lose confidence in our financial reports, and the value of our common
stock and CDIs may be harmed, if our internal controls over financial reporting are found not to be effective by management or by an independent registered public

accounting
firm or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls.

Failure to maintain effective disclosure controls and procedures could result in the loss of investor confidence and an adverse impact on the price of our common stock.

In connection with preparing this prospectus, we discovered that compensation expenses arising from certain stock option grants were
inadvertently omitted from the summary compensation table in amendment no. 1 to our Form 10-K for the fiscal year ended December 31, 2011, which we previously filed
with the SEC. We corrected this omission promptly after discovering it by filing a second amendment to our Form 10-K. If we do not, or if investors perceive that we do not,
establish and maintain adequate disclosure controls and procedures, investors could lose confidence in our reports filed with the SEC, which would harm the trading price of our common stock.

Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain litigation that may be initiated by
our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with the Company.

Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of
Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a
fiduciary duty owed by any of our directors, officers or other employees or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General
Corporation Law, or (iv) any other action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our
capital stock shall be deemed to have notice of and to have consented to the provisions described above. This forum selection provision may limit our stockholders' ability to obtain a judicial forum
that they find favorable for disputes with us or our directors, officers or other employees or stockholders.

Our certificate of incorporation, bylaws and the Delaware General Corporation Law may delay or deter a change of control transaction.

Certain provisions of our certificate of incorporation and bylaws may have the effect of deterring takeovers, such as those provisions
authorizing our board of directors to issue, from time to time, any series of preferred stock and fix the designation, powers, preferences and rights of the shares of such series of preferred stock;
prohibiting stockholders from acting by written consent in lieu of a meeting; requiring advance notice of stockholder intention to put forth director nominees or bring up other business at a
stockholders' meeting; prohibiting stockholders from calling a special meeting of stockholders; requiring a 662/3% majority stockholder approval in order for stockholders to amend
certain provisions of our certificate of incorporation or bylaws or adopt new bylaws; providing that, subject to the rights of preferred shares, the directors will be divided into three classes and
the number of directors is to be fixed exclusively by our board of directors; and providing that none of our directors may be removed without cause. Section 203 of the Delaware General
Corporation Law, from which we did not elect to opt out, provides that if a holder acquires 15% or more of our stock without prior approval of our board of directors, that holder will be subject to
certain restrictions on its ability to acquire us within three years. These provisions may delay or deter a change of control of us, and could limit the price that investors might be willing to pay in
the future for shares of our common stock.

It may be difficult to effect service of U.S. process and enforce U.S. legal process against our directors.

Five of our eight directors reside outside of the United States, principally in Australia. A substantial portion of the assets of our
directors also are located outside of the United States. Therefore, it may not be

possible
to effect service of process within the United States upon these persons in order to enforce judgments of U.S. courts against these persons based on the civil liability provisions of the U.S.
federal securities laws. In addition, there is doubt as to the enforceability in Australia, in original actions or in actions to enforce judgments of U.S. courts, of claims predicated solely upon U.S.
federal securities laws. This could make it more difficult or impossible for investors to litigate or recover damages from our directors in securities litigation or other claims.

If we are not able to maintain sufficient cash funds, we may cease trading on the ASX.

If we are not able to maintain sufficient funds to fund our activities or if ASX considers that our financial position is not adequate
to warrant the continued quotation of our CDIs on ASX, ASX may suspend our CDIs from quotation. This would limit our liquidity and, in particular, could harm the ability of CDI holders to liquidate
their position in our company. In addition, the value of our company could decline if we are not able to maintain our listing on ASX.

If you purchase the common stock sold in this offering, you will experience immediate dilution in your investment.

The public offering price per share of common stock in this offering exceeds the net tangible book value per share of our common stock
outstanding prior to this offering. As a result of this offering by us of 2,500,000 shares at the assumed public offering price, and after deducting the estimated underwriting discount and
estimated offering expenses payable by us, you will experience immediate dilution of $7.37 per share, representing the difference between our as adjusted net tangible book
value per share as of June 30, 2012 after giving effect to this offering, and the public offering price. You will experience additional dilution if the underwriters exercise their
over-allotment option. In addition, if the purchasers under the securities purchase agreement, dated February 6, 2012, by and among us and the purchasers party thereto exercise
their preemptive rights in connection with this offering, we could be required to sell shares of our common stock to those purchasers at the price to the public in this offering, which could be less
than the market price of our common stock at the time of sale to those purchasers, which could result in dilution to purchasers in this offering and cause the price of our common stock to decline.

We are an "emerging growth company," under federal securities laws and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies
will make our common stock less attractive to investors.

We are an "emerging growth company," as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may
take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the
auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. The JOBS Act also
permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to U.S. public companies. We could be an emerging
growth company for up to five years, although we could lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in
a three-year period, or if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we
would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions.
If some investors find our common stock less attractive as a result, there may be a

less
active trading market for our common stock and CDIs and our stock price may decline or be more volatile.

As
explained above, Section 102(b)(1) of the JOBS Act also provides that an "emerging growth company" can take advantage of the extended transition period provided in
Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An "emerging growth company" can delay the adoption of new or revised accounting standards that
have different effective dates for public and private
companies until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period, and as a result of this election, our
financial statements may not be comparable to those of companies that comply with public company effective dates for new or revised accounting standards for U.S. public companies.

Our CDIs are traded on the ASX and we are subject to the Listing Rules of the ASX, which increase our operating costs and subject us to regulations not applicable to most
other companies listed on the Nasdaq Capital Market.

Since 2004, CDIs representing beneficial ownership of our common stock have been traded on the ASX. We therefore are subject to the
Listing Rules of the ASX, which regulate certain actions we can take, such as limiting the circumstances under which we may issue shares of our common stock or CDIs without stockholder approval and
require us to disregard votes cast by certain stockholders potentially interested in matters to be voted on at annual or special meetings of stockholders when such stockholders are permitted to vote
at the meeting in accordance with the General Corporation Law of Delaware and Nasdaq Listing Rules. Most other companies listed on the Nasdaq Capital Market are not subject to the additional
regulatory requirements imposed by the ASX Listing Rules, which increase our operating costs relative to other Nasdaq-listed companies, may make it more difficult to effect certain corporate actions,
and might make an investment in our common stock less attractive to potential purchasers.

This prospectus contains forward-looking statements. In some cases, you can identify forward-looking statements by the following words:
"anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "ongoing," "plan," "potential," "predict," "project," "should," "will," "would," or the negative of these terms or
other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and will not necessarily
be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made
and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information
expressed or implied by the forward-looking statements in this prospectus. These factors include:



our ability to obtain additional financing;



our dependence on a single product candidate;



the cost, timing and results of our clinical trials, regulatory submissions and approvals;



our dependence on a single or limited number of manufacturers and suppliers for critical components of our system;

You
should read the matters described in "Risk Factors" and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever
they appear in this prospectus. We cannot assure you that the forward-looking statements in this prospectus will prove to be accurate and therefore you are encouraged not to place undue reliance on
forward-looking statements. You should read this prospectus completely. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our
situation may change in the future.

We estimate we will receive net proceeds from this offering of approximately $22,548,250, after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us.

We
intend to use approximately $300,000 of the net proceeds from this offering to repay outstanding indebtedness to our outside legal counsel (see "Legal Matters") and the remainder of
the net proceeds to fund our pivotal clinical trial and for general corporate purposes. General corporate purposes may include providing working capital and funding capital expenditures and research
and development. Other than the payment of outstanding indebtedness to our outside legal counsel, as of the date of this prospectus, we cannot specify with certainty all of the particular uses of the
proceeds from this offering.

A
$1.00 increase or decrease in the assumed public offering price would increase or decrease the estimated net proceeds we receive from this offering by $2.5 million, assuming the number
of shares we offer, as set forth on the cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

In
addition, if the purchasers under our securities purchase agreement dated February 6, 2012 elect to purchase all shares we must offer them pursuant to that agreement, we
estimate we would generate additional net proceeds of $7.8 million, assuming the number of shares we offer as set forth on the cover of this prospectus remains the same. We intend to use any proceeds
from the sale of any additional shares pursuant to the February 2012 securities purchase agreement to fund our pivotal clinical trial and for general corporate purposes. We cannot determine at this
time how many shares, if any, the purchasers under the February 2012 securities purchase agreement will purchase pursuant to their preemptive rights thereunder.

Commencing February 16, 2012, our shares of common stock began trading on the Nasdaq Capital Market under the symbol "SSH." Our
shares of common stock have also traded in the form of CDIs on the ASX under the symbol "SHC" since September 2004.

The
following table sets forth, for the periods indicated, the high and low trading prices for our common stock as reported on the Nasdaq Capital Market, in U.S. Dollars and as converted
into Australian Dollars, and for our CDIs as reported on the ASX, in Australian Dollars and as converted into U.S. Dollars. All currency conversions are based on the prevailing Australian Dollar to
the U.S. Dollar rate on the last day of each respective quarter.

Period

High
(A$)

Low
(A$)

High
(US$)

Low
(US$)

ASX

Year Ended December 31, 2011:

First Quarter

9.00

6.00

9.40

6.20

Second Quarter

12.60

7.80

13.60

8.40

Third Quarter

11.00

7.00

10.80

6.80

Fourth Quarter

9.40

6.40

9.20

6.60

Year Ended December 31, 2010:

First Quarter

8.20

6.20

8.00

6.00

Second Quarter

7.40

5.80

6.20

4.80

Third Quarter

7.20

4.60

7.00

4.40

Fourth Quarter

7.80

4.60

8.00

4.80

Nasdaq Capital Market

First Quarter (from February 16, 2012)

n/a

n/a

22.90

8.50

Second Quarter

n/a

n/a

8.85

2.50

Third Quarter (through July 27, 2012)

n/a

n/a

17.25

2.75

On
July 27, 2012, the closing price of our common stock on the Nasdaq Capital Market was $10.01. As of July 20, 2012, we had 6,277,538 shares of common stock issued
and outstanding, and there were 31 holders of record of our common stock.

We have not historically paid dividends on our common stock. We intend to retain our future earnings, if any, to finance the expansion
and growth of our business, and we do not expect to pay cash dividends on our common stock in the foreseeable future. Payment of future cash dividends, if any, will be at the sole discretion of our
board of directors after taking into account various factors, including our financial condition, earnings, capital requirements of our operating subsidiaries, covenants associated with any debt
obligations, legal requirements, regulatory constraints and other factors deemed relevant by our board of directors. Moreover, if we determine to pay any dividend in the future, there can be no
assurance that we will continue to pay such dividends.

Our common stock is currently listed on the Nasdaq Capital Market. However, our underwriters are not obligated to make a market in our
securities, and even if they choose to make a market, they can discontinue at any time without notice. Neither we nor the underwriters can provide any assurance that an active and liquid trading
market in our securities will develop further or, if developed further, that the market will continue.

The
public offering price of the securities offered by this prospectus will be determined by negotiation between us and the underwriters. Among the factors considered in determining the
public offering price of the shares will be:



our history and our prospects;



the industry in which we operate;



our past and present operating results;



recent trading prices of our common stock on the Nasdaq Capital Market and of our CDIs on the ASX;



the previous experience of our executive officers; and



the general condition of the securities markets at the time of this offering.

The
offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the shares. That price is subject to change as a result of
market conditions and other factors, and we cannot assure you that the shares can be resold at or above the public offering price.

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2012:



on an actual basis; and



on a pro forma as adjusted basis to give effect to our sale of 2.5 million shares of common stock at the assumed
public offering price, after deducting the estimated underwriting discount and estimated offering expenses payable by us.

You
should read this table in conjunction with "Use of Proceeds" above as well as our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and
financial statements and the related notes appearing elsewhere in this prospectus.

The
table and calculations above are based on the number of shares of common stock outstanding as of June 30, 2012, and exclude:



an aggregate of 892,642 shares issuable upon the exercise of then outstanding options at a weighted average
exercise price of $10.05 per share;



an aggregate of 1,564,649 shares issuable upon the exercise of then outstanding warrants at a weighted average
exercise price of A$7.49 per share (approximately $7.66 using a conversion rate of A$1.00 to $1.0231);



an aggregate of 123,820 shares available for future grants under our 2011 Equity Incentive Plan;



the 375,000 shares of common stock subject to the underwriters' over-allotment option; and



any shares of common stock we might sell pursuant to the preemptive rights granted to the purchasers under our securities
purchase agreement dated February 6, 2012.

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the public offering
price per share of our common stock and the net tangible book value per share of our common stock immediately after completion of this offering. Net tangible book value per share represents total
tangible assets less total liabilities, divided by the number of shares of common stock outstanding. As of June 30, 2012, the net tangible book value of our common stock was approximately
$0.6 million, or approximately $0.10 per share.

After
giving effect to our sale of 2.5 million shares at the assumed public offering price, deducting estimated underwriting discounts and commissions and estimated offering
expenses payable by us, and applying the net proceeds from this sale, the pro forma net tangible book value of our common stock would have been approximately $23.2 million, or $2.64 per
share, as of June 30, 2012. This amount represents an immediate
increase in net tangible book value to our existing stockholders of $2.54 per share and an immediate dilution to new investors of $7.37 per share.

The
following table illustrates this per share dilution:

Assumed public offering price per share

$

10.01

Net tangible book value per share as of June 30, 2012

$

0.10

Pro forma increase per share attributable to new investors

$

2.54

Pro forma net tangible book value per share after this offering

$

2.64

Dilution per share to new investors

$

7.37

If
the underwriters exercise in full their over-allotment option to purchase 375,000 shares of common stock offered in this offering at the assumed public offering
price, the pro forma net tangible book value after this offering would be $26.7 million, representing an increase in net tangible book value of $2.81 per share to existing stockholders and
immediate dilution in net tangible book value of $7.09 per share to new investors purchasing our common stock in this offering. A $1.00 increase or decrease in the assumed public offering price per
share would increase or decrease, respectively, the pro forma net tangible book value per share of common stock after this offering by $0.26 per share and increase or decrease, respectively, the pro
forma dilution per share of common stock to new investors in this offering by $0.74 per share, in each case calculated as described above and assuming that the number of shares offered by us, as set
forth on the cover page of this prospectus, remains the same.

To
the extent that any outstanding options or warrants are exercised or the purchasers under the February 2012 securities purchase agreement exercise their 60-day purchase
right in connection with this offering, investors will experience further dilution.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with our financial statements and related notes appearing elsewhere in this prospectus. Our actual results could differ materially from
those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in "Risk Factors" and "Special Note
Regarding Forward-Looking Statements" included elsewhere in this prospectus.

Overview

We are an early-stage medical device company focused on developing, manufacturing and commercializing our C-Pulse System
for treatment of Class III and ambulatory Class IV heart failure. The C-Pulse System utilizes the scientific principles of
intra-aortic balloon counter-pulsation applied in an extra-aortic approach to assist the left ventricle by reducing the workload required to pump blood throughout the body, while increasing blood flow
to the coronary arteries.

We
are in the process of pursuing regulatory approvals necessary to sell our system in the United States. We completed enrollment of our North American feasibility clinical trial in the
first half of 2011. In November 2011, we announced the preliminary results of the six-month follow-up period for the feasibility study and we submitted the clinical data to the
FDA. In March 2012, the FDA notified us that it completed its review of the C-Pulse System feasibility trial data, concluded we met the applicable agency requirements and indicated that we
can move forward with an IDE application. We expect to submit an IDE application to the FDA in the second half of 2012 for approval to initiate our pivotal trial. We expect to complete enrollment of
our pivotal trial by the end of 2015 and do not anticipate marketing our system in the United States before 2017.

We
obtained CE Mark approval for the C-Pulse System in July 2012 and have taken initial steps to evaluate the potential market for our system in targeted countries in Europe
in anticipation of commencing commercial sales. In order to gain additional clinical data and support reimbursement in Europe, we also expect to initiate a post-market trial in Europe that
will evaluate endpoints similar to those for our U.S. pivotal trial.

Critical Accounting Policies and Estimates

Revenue Recognition: We recognize revenue when (i) persuasive evidence of a customer arrangement exists; (ii) the price is fixed or
determinable and free of contingencies or uncertainties; (iii) collectability is reasonably assured; and (iv) product delivery has occurred, which is when product title transfers to the
customer, or services have been rendered. Sales are not conditional based on customer acceptance provisions or installation obligations. Our C-Pulse System is not approved for commercial
sale in the United States and we have not commenced sales of our C-Pulse system outside of the United States. Our revenue consists solely of sales of the C-Pulse System to hospitals and
clinics pursuant to research arrangements and with appropriate regulatory approvals for sales in conjunction with our feasibility clinical trial. For clinical trial implant revenue, the product title
generally transfers on the date the system is implanted. We do not charge hospitals and clinics for shipping. We expense shipping costs at the time we report the related revenue and record such costs
in cost of sales.

Foreign Currency Translation and Transactions: Foreign denominated monetary assets and liabilities are translated at the rate of exchange
prevailing
at the balance sheet date. Results of operations are translated using the average rates prevailing during the reporting period. Our Australian subsidiary's functional currency is the Australian
Dollar. Translation adjustments result from translating the subsidiary's

financial
statements into our reporting currency, the U.S. Dollar. The translation adjustment has not been included in determining our net loss, but has been reported separately and is accumulated in
a separate component of equity.

Effective
January 1, 2011, we concluded that the functional currency of our U.S.-based parent company is the U.S. Dollar. We have concluded that the functional currency of the
Australian subsidiary remains the Australian Dollar.

Comprehensive Income (Loss): The components of comprehensive income (loss) include net income (loss) and the effects of foreign currency
translation
adjustments.

Stock-Based Compensation: We recognize all share-based payments, including grants of stock options in the income statement as an operating
expense
based on their fair value over the requisite service period.

We
compute the estimated fair values of stock options using the Black-Scholes option pricing model. No tax benefit has been recorded due to the full valuation allowance on deferred tax
assets that we have recorded.

Stock-based
compensation expense is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates.

Equity
instruments issued to non-employees, and for services and goods, are shares of our common stock, warrants or options to purchase shares of our common stock. These
shares, warrants or options are either fully-vested and exercisable at the date of grant or vest over a certain period during which services are provided. We expense the fair market value of these
securities over the period in which the related services are received.

Going Concern: Our financial statements have been prepared and presented on a basis assuming we continue as a going concern.

During
the years ended December 31, 2011 and 2010 and through June 30, 2012, we incurred losses from operations and net cash outflows from operating activities as disclosed
in the consolidated statements of operations and cash flows, respectively.

Our
ability to continue as a going concern is dependent on our ability to raise additional capital as and when required. Our directors, after due consideration, believe that we will be
able to raise new equity capital as required to fund our business plan. Should our future efforts to raise capital not be successful, we may not be able to continue as a going concern. Furthermore,
our ability to continue as a going concern is subject to our ability to develop and successfully commercialize our C-Pulse System being developed. If we are unable to obtain such funding
of an amount and on a timeline necessary to meet our future operational plans, or to successfully commercialize our intellectual property, we may be unable to continue as a going concern. No
adjustments have been made relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we not continue as a going
concern.

Accounting Standards Applicable to Emerging Growth Companies: As noted above, we qualify as an "emerging growth company" pursuant to the
provisions
of the JOBS Act, enacted on April 5, 2012. Section 102(b)(1) of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in
Section 7(a)(2)(B) of the Securities Act for complying with new or

revised
accounting standards. We have elected to take advantage of the benefits of this extended transition period, and as a result of this election, our financial statements may not be comparable to
those of
companies that comply with public company effective dates for new or revised accounting standards for U.S. public companies.

Internal Controls and Procedures

Our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal control
over financial reporting, and will not be required to do so for as long as we are an "emerging growth company" pursuant to the provisions of the JOBS Act.

Recent Accounting Pronouncements

In May 2011, the FASB issued an update to accounting guidance for improved fair value measurement and disclosures. The update
represents converged guidance between U.S. GAAP and IFRS, resulting in common requirements for measuring fair value and for disclosing information about fair value measurements. This new
guidance was effective for our fiscal year beginning January 1, 2012 and the adoption of this guidance did not have an impact on our financial position, results of operations or cash flows.

In
June 2011, the FASB issued amended disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other
comprehensive income ("OCI") as part of the statement of changes in equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive
income or in two separate but consecutive financial statements. We adopted these changes effective January 1, 2012 and applied them retrospectively for all periods presented. There was no
impact to our consolidated results as the amendments related only to changes in financial statement presentation.

Financial Overview

We are an early-stage medical device company focused on developing, manufacturing and commercializing our C-Pulse System
for treatment of Class III and ambulatory Class IV heart failure. Our activities since inception have consisted principally of raising capital, performing research and development and
conducting preclinical and clinical trials. At June 30, 2012, we had
an accumulated deficit of $71.9 million and we expect to incur losses for the foreseeable future. To date, we have been funded by private and public equity financings. Although we believe that
we will be able to successfully fund our operations, there can be no assurance that we will be able to do so or that we will ever operate profitably.

Results of Operations

Comparison of Three Months Ended June 30, 2012 to Three Months Ended June 30, 2011

Revenue

Three Months Ended
June 30, 2012

Three Months Ended
June 30, 2011

Increase (Decrease)

% Change

$



$



$



N/A

Sales
of the C-Pulse System to hospitals and clinics pursuant to research arrangements and with the appropriate regulatory approvals for sales in conjunction with our
feasibility clinical trial historically have generated our revenue. We did not have any sales of our C-Pulse System device in the three month periods ended June 30, 2012 or 2011, as
we completed enrollment in our feasibility trial in early 2011 and have not

yet
commenced enrollment in our pivotal clinical trial. We expect our revenue will be minimal until we begin enrolling patients in our North American pivotal clinical trial and initiate trials in
select countries in Europe under our CE Mark, both expected to commence in the second half of 2012.

Research and Development Expense

Three Months Ended
June 30, 2012

Three Months Ended
June 30, 2011

Increase (Decrease)

% Change

$

1,787,000

$

2,374,000

$

(587,000

)

(24.7

)%

Our
decrease in research and development expense for the three months ended June 30, 2012 compared to the prior year's period was primarily caused by the timing of certain
outsourced development activities related to our C-Pulse System period to period. We expect our research and development expense will continue to be lower than the comparable prior year
period in the third quarter 2012, then sequentially increase as we add personnel to support our pivotal clinical trial and pursue our development efforts.

Selling, General and Administrative Expense

Three Months Ended
June 30, 2012

Three Months Ended
June 30, 2011

Increase (Decrease)

% Change

$

1,569,000

$

1,178,000

$

391,000

33.2

%

Our
increase in selling, general and administrative expense for the three months ended June 30, 2012 compared to the prior year was primarily caused by increased stock-based
compensation expense resulting from current-year stock option grants, and increased professional fees and personnel additions in 2011 as we developed our infrastructure, and in preparation
for European trials expected to commence in the second half of 2012. We expect our selling, general and administrative expense will continue to be above comparable prior year period levels in future
periods as a result of the infrastructure recently put in place to support our growth.

Interest Income

Three Months Ended
June 30, 2012

Three Months Ended
June 30, 2011

Increase (Decrease)

% Change

$

4,000

$

80,000

$

(76,000

)

(95)

%

Our
decrease in interest income for the three months ended June 30, 2012 compared to the prior year was primarily caused by lower average cash balances during the three months
ended of June 30, 2012 as compared to June 30, 2011.

Income Tax Benefit

Three Months Ended
June 30, 2012

Three Months Ended
June 30, 2011

Increase (Decrease)

% Change

$

(730,000

)

$



$

(730,000

)

N/A

%

Our
income tax benefit for the three months ended June 30, 2012 resulted from a research and development tax credit in Australia. We completed our Australian tax return for the
twelve-month period ended June 30, 2011 in the second quarter of 2012 and received a $730,000 research and development tax credit refund during the quarter. Assuming no further changes to the
applicable Australian law for research and development tax credits, we expect to receive tax refunds in the future in amounts that vary based on research and development expenditures in Australia. At
this time, we are working to complete our analysis

of
the potential research and development tax credit refund that may be available for the period ended June 30, 2012.

Comparison of Six Months Ended June 30, 2012 to Six Months Ended June 30, 2011

Revenue

Six Months Ended
June 30, 2012

Six Months Ended
June 30, 2011

Increase (Decrease)

% Change

$



$



$



N/A

Sales
of the C-Pulse System to hospitals and clinics pursuant to research arrangements and with the appropriate regulatory approvals for sales in conjunction with our
feasibility clinical trial historically have generated our revenue. We did not have any sales of our C-Pulse System device in the six month periods ended June 30, 2012 or 2011, as
we completed enrollment in our feasibility trial in early 2011 and have not yet commenced enrollment in our pivotal clinical trial. We expect our revenue will be minimal until we begin enrolling
patients in our North American pivotal clinical trial and initiate trials in select countries in Europe under our CE Mark, both expected to commence in the second half of 2012.

Research and Development Expense

Six Months Ended
June 30, 2012

Six Months Ended
June 30, 2011

Increase (Decrease)

% Change

$

3,953,000

$

4,666,000

$

(713,000

)

(15.3

)%

Our
decrease in research and development expense for the six months ended June 30, 2012 compared to the prior year's period was primarily caused by the timing of certain
outsourced development activities related to our C-Pulse System period to period. We expect our research and development expense will continue to be lower than the comparable prior year
period in the third quarter 2012, then sequentially increase as we add personnel to support our pivotal clinical trial and pursue our development efforts.

Selling, General and Administrative Expense

Six Months Ended
June 30, 2012

Six Months Ended
June 30, 2011

Increase (Decrease)

% Change

$

3,509,000

$

1,820,000

$

1,689,000

92.8

%

Our
increase in selling, general and administrative expense for the six months ended June 30, 2012 compared to the prior year was primarily caused by increased stock-based
compensation expense resulting from current-year stock option grants, and increased professional fees and personnel additions in 2011 as we developed our infrastructure and prepared for
our Nasdaq listing completed in February 2012, and in preparation for European trials expected to commence in the second half of 2012. We expect our selling, general and administrative expense will
continue to be above comparable prior year period levels in future periods as a result of the infrastructure recently put in place to support our growth.

Our
decrease in interest income for the six months ended June 30, 2012 compared to the prior year was primarily caused by lower average cash balances during the six months ended
June 30, 2012 as compared to the six months ended June 30, 2011.

Income Tax Benefit

Six Months Ended
June 30, 2012

Six Months Ended
June 30, 2011

Increase (Decrease)

% Change

$

(730,000

)

$



$

(730,000

)

N/A

Our
income tax benefit for the six months ended June 30, 2012 resulted from a research and development tax credit in Australia. We completed our Australian tax return for the
twelve-month period ended June 30, 2011 in the second quarter of 2012 and received a $730,000 research and development tax credit refund during the quarter. Assuming no further changes to the
applicable Australian law for research and development tax credits, we expect to receive tax refunds in the future in amounts that vary based on research and development expenditures in Australia. At
this time, we are working to complete our analysis of the potential research and development tax credit refund that may be available for the period ended June 30, 2012.

Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010

Revenue

Year Ended
December 31, 2011

Year Ended
December 31, 2010

Increase (Decrease)

% Change

$



$

407,000

$

(407,000

)

N/A

Our
decrease in revenue for the year ended December 31, 2011 compared to the prior year was primarily caused by completion of enrollment in our feasibility clinical trial in March
2011, after which we had no reimbursable implants. Our revenue during the year ended December 31, 2010 consisted solely of sales of the C-Pulse System to hospitals and clinics
pursuant to research arrangements and with appropriate regulatory approvals for sales in conjunction with our feasibility clinical trial.

Research and Development Expense

Year Ended
December 31, 2011

Year Ended
December 31, 2010

Increase (Decrease)

% Change

$

11,199,000

$

6,229,000

$

4,970,000

79.8

%

Our
increase in research and development expense for the year ended December 31, 2011 compared to the prior year was primarily caused by increased development activities related
to our C-Pulse System and the accelerated development of a fully implantable model. We also increased regulatory and clinical personnel to support the completion of our feasibility
clinical trial and to prepare for our pivotal clinical trial.

Selling, General and Administrative Expense

Year Ended
December 31, 2011

Year Ended
December 31, 2010

Increase (Decrease)

% Change

$

5,363,000

$

2,598,000

$

2,765,000

106.4

%

Our
increase in selling, general and administrative expense for the year ended December 31, 2011 compared to the prior year was primarily caused by increased stock-based
compensation expense resulting

from
2011 stock option grants, and increased professional fees and personnel costs as we developed our infrastructure and prepared for our pivotal clinical and Nasdaq listing.

Interest Income

Year Ended
December 31, 2011

Year Ended
December 31, 2010

Increase (Decrease)

% Change

$

251,000

$

150,000

$

101,000

67.3

%

Our
increase in other income for the year ended December 31, 2011 compared to the prior year was primarily caused by increased interest income earned from our increased average
cash balances following the completion of our financings in late 2010 and mid-2011.

Income Tax Benefit

Year Ended
December 31, 2011

Year Ended
December 31, 2010

Increase (Decrease)

% Change

$

(115,000

)

$

(670,000

)

$

(555,000

)

82.8

%

Our
tax income benefit for the year ended December 31, 2011 resulted from a research and development credit in the state of Minnesota for our tax year ended June 30, 2011.
Our income tax benefit for the year ended December 31, 2010 resulted from a research and development tax credit in Australia. We completed our Australian tax return for the period ended
June 30, 2011 in the second quarter of 2012 and received a $730,000 research and development tax credit refund during the quarter, which will be reported in our 2012 second quarter operating
results. Assuming no further changes to the applicable Australian law for research and development tax credits, we expect to receive tax refunds in the future in amounts that vary based on research
and development expenditures in Australia.

Liquidity and Capital Resources

Sources of Liquidity

We have funded our operations primarily through a series of equity issuances, including the issuance of common shares in the form of
CDIs for net proceeds of $7.6 million in 2011, $11.9 million in 2010 and $2.1 million in the six months ended June 30, 2012. As of June 30, 2012 and
December 31, 2011 and 2010, cash and cash equivalents were $1.8 million, $6.6 million, and $12.4 million, respectively.

We
believe, based on our current operating plan, that the net proceeds from this offering, together with our cash balances, cash generated from our clinical trial and interest income,
will be sufficient to meet our anticipated cash requirements through at least the next 12 months. From time to time we may seek to sell additional equity or convertible debt securities or enter
into credit facilities. The sale of additional equity or convertible debt securities may result in dilution to our stockholders. If we raise additional funds through the issuance of convertible debt
or enter into credit facilities, these securities and debt holders could have rights senior to those of our common stock, and this debt could contain covenants that would restrict our operations and
would require us to use cash for debt service rather than our operations. We may require additional capital beyond our currently forecasted amounts. Although we have successfully financed our
operations through the issuance of common stock and warrants to date, any such required additional capital may not be available to us on acceptable terms, or at all.

Cash Flows from Operating Activities

Net cash used in operating activities was $13.1 million in 2011, $7.2 million in 2010, and $6.8 million and
$6.2 million in the six months ended June 30, 2012 and 2011, respectively. The net cash used in each

of
these periods primarily reflects the net loss for those periods, offset in part by depreciation, non-cash, stock-based compensation and the effects of changes in operating assets and
liabilities.

Cash Flows from Investing Activities

Net cash used in investing activities was $451,000 in 2011, $7,000 in 2010, and $107,000 and $43,000 in the six months ended
June 30, 2012 and 2011, respectively. The majority of cash used in investing activities in first half of 2012 and in 2011 was for leasehold improvements, furniture and equipment associated with
the relocation of our headquarters. Cash used in investing activities in 2011 and in 2010 related to purchases of property and equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities was $7.6 million in 2011, $11.9 million in 2010, and $2.1 million and
$183,000 in the six months ended June 30, 2012 and 2011, respectively. Net cash provided by financing activities was primarily attributable to proceeds from sales of our common stock and
warrants.

Capital Resource Requirements

As of June 30, 2012, we did not have any material commitments for capital expenditures.

We are an early-stage medical device company focused on developing, manufacturing and commercializing our C-Pulse System
for treatment of Class III and ambulatory Class IV heart failure. The C-Pulse System utilizes the scientific principles of intra-aortic balloon counter-pulsation applied in
an extra-aortic approach to assist the left ventricle by reducing the workload required to pump blood throughout the body, while increasing blood flow to the coronary arteries.

We
are in the process of pursuing regulatory approvals necessary to sell our system in the United States. We completed enrollment of our North American feasibility clinical trial in the
first half of 2011. In November 2011, we announced the preliminary results of the six-month follow-up period for the feasibility study and we submitted the clinical data
to the FDA. In March 2012, the FDA notified us that it completed its review of the C-Pulse System feasibility trial data, concluded we met the applicable agency requirements, and indicated
that we can move forward with an IDE application. We expect to submit an IDE application to the FDA in the second half of 2012 for approval to initiate our pivotal trial. We expect to complete
enrollment of our pivotal trial by the end of 2015 and do not anticipate marketing our system in the United States before 2017.

We
obtained CE Mark approval for the C-Pulse System in July 2012 and have taken initial steps to evaluate the market potential for our system in targeted countries that
accept the CE Mark in anticipation of commencing commercial sales. In order to gain additional clinical data and support reimbursement in Europe, we also expect to initiate a post-market
trial in Europe that will evaluate endpoints similar to those for our U.S. pivotal trial.

We
incurred net losses of $16.2 million and $7.6 million in the years ended December 31, 2011 and 2010, respectively and $6.7 million in the six months ended
June 30, 2012. Historically, we have generated our revenue solely from sales of the C-Pulse System to hospitals and clinics pursuant to research arrangements and with appropriate
regulatory approvals for sales in conjunction with our feasibility clinical trial. We expect to continue to incur significant net losses as we continue to conduct clinical trials, pursue
commercialization and as we ramp up sales of our system.

Our Market Opportunity

Heart failure is a progressive disease caused by impairment of the heart's ability to pump blood to the various organs of the body.
Patients with heart failure commonly experience shortness of breath, fatigue, difficulty exercising and swelling of the legs. The heart becomes weak or stiff and enlarges over time making it harder to
pump the blood needed for the body to function properly.

Heart
failure is one of the leading causes of death in the United States and other developed countries. The American Heart Association estimates that 5.7 million people in the
United States age 20 and over are affected by heart failure, with an estimated 670,000 new cases diagnosed each year. Nearly 30% of heart failure patients are below the age of 60, and
congestive heart failure is the highest U.S. chronic health care expense category. In addition, the Journal of Cardiac Failure reported in January 2011 that a recent analysis of all Medicare
fees for service readmission to hospitals showed heart failure is the number one cause of re-hospitalization in the United States. In 2013, as part of the Patient Protection and Affordable
Care Act enacted in 2010, hospitals will have to maintain less than 24.7% patient re-hospitalization rates at 30 days due to worsening heart failure or relinquish part of the
reimbursements paid by CMS. We believe this law will encourage hospitals to look more closely at therapies like ours that could enable them to meet these initiatives.

The
severity of heart failure depends on how well a person's heart is able to pump blood throughout the body. A common measure of heart failure severity is the New York Heart
Association, or NYHA, Class guideline. Patients are classified as follows based on their symptoms and functional limitations:



Class I (Mild)Patients have no limits to daily
activities; they are able to perform all normal daily activities without becoming tired, short of breath or having heart palpitations.



Class II (Mild)Patients have some limits to daily
activities; they are comfortable at rest, but normal activities may cause them to be tired, short of breath or have heart palpitations.



Class III (Moderate)Patients' daily activities are
significantly limited; they are comfortable at rest, but are unable to do daily activities without becoming tired, short of breath or having heart palpitations.



Class IV (Severe)Patients are unable to do any
physical activity without discomfort; they become tired, short of breath and possibly have heart palpitations even when they are at rest. Any physical activity makes discomfort worse.

Our
C-Pulse System targets Class III and ambulatory Class IV patients as defined by the NYHA. It is estimated that approximately 1.5 million heart
failure patients in the United States fall into this classification range, and we believe approximately 3.7 million patients in Europe are similarly affected. In
addition to the symptoms described above, patients with Class III and ambulatory Class IV heart failure typically experience dizziness, low blood pressure and fluid retention.

Treatment
alternatives currently available for Class III heart failure patients in the United States consist primarily of pharmacological therapies and pacing devices that are
designed to address heart rhythm issues. Although these treatments may provide symptomatic relief and prolong the life of patients, they do not often halt the progression of congestive heart failure.
Circulatory assist devices, specifically left ventricular assist devices, or LVADs, have been used to treat Class IV patients in the United States, and one product received FDA approval in the
United States for Class IIIb patients although the device is not reimbursed by CMS for Class IIIb patients. These devices are designed to take over some or all of the pumping function of
the heart by mechanically pumping blood into the aorta. Although such products are effective in increasing blood flow, these devices are implanted in the patient's body and by design are in contact
with the patient's bloodstream, increasing the risk of adverse events, including thrombosis, bleeding and neurologic events. The FDA recently rejected a proposed clinical trial that would evaluate the
safety and performance of an LVAD technology for Class III heart failure patients because they did not believe the technology risks outweighed the potential rewards for these patients.

Our Strategy

Our goal is to become a market leader in the treatment of heart failure patients through the commercialization of our
C-Pulse System, and to continue the development of the system to make it safer and more convenient for patients and physicians. We believe that our technology will provide us with a
competitive advantage in the market for treating specific segments of heart failure patients. To achieve our objectives, we intend to:



Plan for the Commercial Launch of the C-Pulse System in
EuropeWe obtained CE Mark approval for the C-Pulse System in July 2012 and have taken initial steps to evaluate the market potential for our system in targeted
countries in Europe in anticipation of commencing commercial sales. We initially plan to sell the C-Pulse System in Europe through experienced distributors in countries where our system is
approved for reimbursement or where we otherwise believe there might be a potentially profitable market for our system. We expect our initial sales efforts in Europe will focus on Germany and Italy,
which we believe are the largest potential markets for the

C-Pulse
System in Europe and have supported reimbursement for heart failure technologies in the past.



Obtain IDE Approval for our Pivotal Trial in the United
StatesWe completed enrollment of the North American feasibility clinical trial in the first half of 2011. In November 2011, we obtained the preliminary
results of the six-month follow-up period for our North American feasibility clinical trial. In March 2012, the FDA notified us that it completed its review of the
C-Pulse System feasibility trial data, concluded we met the applicable agency requirements, and indicated that we can move forward with an IDE application. We anticipate that we will
submit an IDE application to the FDA in the second half of 2012 and complete enrollment of our pivotal trial by the end of 2015.



Conduct Trials in Europe to Support Reimbursement of the C-Pulse
SystemWe have retained consultants to analyze the conditions in various European countries for potential reimbursement for our system and the capabilities of
existing hospitals and clinics to implant the C-Pulse System properly and understand the potential benefits of our system. We are targeting the leading LVAD/transplant centers to gain
support, promote our technology, and conduct a non-randomized post-market trial that will evaluate endpoints similar to those for our U.S. pivotal trial to aid our
reimbursement efforts and gain additional clinical data. We expect to be able to complete this trial in 2014 in our initial target markets.



Continue to Enhance the C-Pulse SystemWe believe
it will be important to continue refining the C-Pulse System to make it more appealing for both patients and physicians. Since completing our 20 patient North American feasibility trial,
we have made several improvements to the C-Pulse System based on the feasibility trial outcomes and feedback we received from surgeons and patients during the trial. These changes include
enhancements to our driver, cuff, Percutaneous Interface Leads, or PIL, and our C-Patch, among others. We have also completed an initial animal study of a next-generation,
fully-implantable C-Pulse System, which would eliminate the risk of exit-site infections.

Our System

The C-Pulse System utilizes the scientific principles of intra-aortic balloon counter-pulsation applied in an extra-aortic
approach to assist the left ventricle by reducing the workload required to pump blood throughout the body, while increasing blood flow to the coronary arteries. Combined, these potential benefits may
help sustain the patient's current condition, or, in some cases, reverse the heart failure process, thereby potentially preventing the need for later-stage heart failure devices, such as LVADs,
artificial hearts or transplants. It may also provide relief from the symptoms of Class III and ambulatory Class IV heart failure and improve quality of life and cardiac function. Based
on the patient results from our feasibility trial, we also believe that some patients treated with our C-Pulse System will be able to stop using the device due to sustained improvement in
their conditions as a result of the therapy.

Once
implanted, the C-Pulse cuff is positioned on the outside of the patient's ascending aorta above the aortic valve. An electrocardiogram sensing lead is then attached to
the heart to determine timing for cuff inflation and deflation in synchronization with the heartbeat. As the heart fills with blood, the C-Pulse cuff inflates to push blood from the aorta
to the rest of the body and to the heart muscle via the coronary arteries. Just before the heart pumps, the C-Pulse cuff deflates to reduce the heart's workload through pressure changes,
allowing the heart to pump with less effort. The C-Pulse cuff and electrical leads are connected to a single line that is run through the abdominal wall to connect to a power driver
outside the body. The system's driver and battery source are contained inside a carrying bag.

Surgeons
in the feasibility phase of our clinical trial initially implanted the C-Pulse System in patients via a full sternotomy. We have developed a procedure to allow the
C-Pulse System to be implanted via a small pacemaker-like incision between the patient's ribs and sternum, rather than through a full sternotomy, and the first implant using
this less invasive procedure was completed in 2010. Patients implanted via our minimally invasive procedure typically require a hospital stay of four to seven days in connection with implantation of
the C-Pulse System, after which they return home. This compares to an average hospital stay of 14 days for patients implanted with the C-Pulse System via a full
sternotomy. Further, final clinical data from two LVAD studies indicate median hospital stays of 19 and 25 days for patients implanted via a full sternotomy. Therefore, we believe this less
invasive approach can reduce procedural time, hospital stays, overall cost and patient risk as compared to treatment options that require a full sternotomy.

The
C-Pulse System distinguishes itself from other mechanical heart failure therapies in two important respects, which we believe differentiate our system from other products
addressing moderate to severe heart failure patients:



The C-Pulse System is Placed Outside a Patient's Vascular
System. The C-Pulse cuff is placed outside a patient's ascending aorta and assists the heart's normal pumping function,
rather than being inserted into the vascular system and replacing heart function in a manner similar to other devices such as LVADs. Because the C-Pulse System remains outside the vascular
system, there is potentially less risk of complications such as blood clots, stroke and thrombosis in comparison to other mechanical devices that reside or function inside the vascular system. Because
it rests outside the vasculature, it also does not require blood thinning agents that are necessary for patients with devices that are in contact with the bloodstream. As with any implanted device,
patients using our system have a risk of infection from the implantation procedure, and any untreated sternal infection arising from the implantation procedure or otherwise could result in erosion of
the aortic wall or an aortic rupture in connection with using our system. Because our system has been implanted in a limited number of patients to date, the potential competitive disadvantages and
risks associated with the use of our system are not fully known at this time.



The C-Pulse System Can be Safely Turned On or Off at Any
Time. The C-Pulse System does not need to be in constant operation for patients once implanted, and the device can be safely
turned on or off at any time. This feature allows patients intervals of freedom to perform certain activities such as showering. Patients are not required to visit a medical facility when turning our
device on or off or using the device. However, patients are advised to turn off the C-Pulse System only for short periods of time and for specified activities to maximize the benefit from
the system. If the C-Pulse System is not used as directed, patients might experience a return of their heart failure symptoms, a loss of any improvement in their condition resulting from
use of our system or an overall worsening of their heart failure symptoms compared to when they began using our system.

Clinical Development

Our North American feasibility clinical trial was primarily designed to assess safety and provide indications of performance of the
C-Pulse System in moderate to severe heart failure patients who suffer from symptoms such as shortness of breath and reduced mobility. In the first half of 2011, we completed enrollment
and implantation of 20 patients in the trial and received FDA approval of an expansion protocol to allow us to implant up to 20 additional patients and add two centers to
our feasibility study. We implanted two additional patients and currently do not have plans to implant any additional patients in the United States because the FDA notified us in March 2012 that it
completed its review of the C-Pulse

System
feasibility trial data, concluded we met the applicable agency requirements and indicated that we can move forward with an IDE application.

In
November 2011, we announced the preliminary results of the six-month follow-up period for the feasibility study and we submitted the clinical data to
the FDA. The table below summarizes results from the six-month follow-up data as well as the twelve-month data, which became available in June 2012. We also completed a
two-year follow-up for a patient implanted with our system in July 2012.

Summary of Efficacy Measures

All Patients
Mean (Average) ± Standard Deviation (Range)(1)

Parameter

Change from Baseline(2) at 6 months
Number of Patients=15(3)

Change from Baseline(2) at 12 months
Number of Patients=12(4)

Significance

Quality of Life
(MLWHF score)(5)

-23.4 ± 19.0

-24.6 ± 16.5

A reduction of seven points (-7) demonstrates material improvement in patient quality of life. Average patient results at 6 and 12 months were more than 3 times the reduction needed
to show a material improvement in quality of life using the MLWHF standard.

NYHA Class

-1.1 ± 0.7

-1.2 ± 0.8

Material reduction to NYHA Class for most patients as indicated in footnote 6 below.

Six Minute Hall
Walk (meters)

24.1 ± 62.6

46.8 ± 64.9

On average, patients were able to walk an additional 24 meters during a 6-minute period 6 months after implantation compared to their pre-implantation ability. This improvement
doubled from 6-12 months.

(1)

All
event types and relationship to device have been adjudicated by the Clinical Events Committee (CEC). The numbers in the chart reflect the
average change in patient results and the range of patient results for the particular parameter after C-Pulse System implant.

(2)

Baseline
reflects a patient's result for the particular parameter prior to C-Pulse System implant.

(3)

Patients
at 6 months exclude 1 patient that received a heart transplant, 1 patient implanted with an LVAD, 1 patient death during
surgery to treat a sternal infection, 1 patient death resulting from a non-device related drug allergic reaction, and 1 patient death for which the autopsy report notes "no definite
anatomic cause of death" and for which the investigator stated the death was due to a respiratory, non-device related issue.

(4)

Patient
population at 12 months includes patients from 6-month follow-up, excluding 1 patient that received a
heart transplant at day 212, 1 patient removed from the study at day 232 due to issues with the PIL that led physician to implant an LVAD, and 1 patient that was explanted due to a fall that resulted
in damage to the PIL.

Minnesota
Living with Heart Failure Quality of Life (MLWHF) scores are derived from a questionnaire that asks each patient to indicate, using
a six-point scale (zero to five), how much each of 21 facets prevents the patient from living as desired.

(6)

The
table below summarizes the data from follow-up periods indicated for NYHA Class:

Follow-up Period

No Change

1 Class
Reduction

2 Class
Reduction

3 Class
Reduction

6 months

3

7

5

0

12 months

2

7

2

1

Each
decrease in NYHA Class represents an improvement to a patient's heart failure symptoms or a reduction in the patient's functional
limitations. See page 44 for a summary of the NYHA classification system.

All
event types and relationship to device have been adjudicated by the Clinical Events Committee (CEC).

(2)

Device-related
adverse event of aortic disruption at time of re-do surgery for mediastinitis, which is swelling and irritation
(inflammation) of the area between the lungs (mediastinum), usually caused by infection.

(3)

A
PICC line is a peripherally inserted central catheter, which is a long, slender, small, flexible tube. The PICC line is
inserted into a peripheral vein, typically in the upper arm, and advanced until the catheter tip terminates in a large vein in the chest near the heart to obtain intravenous access. It is similar to
other central lines, as it terminates into a large vessel near the heart.

Sepsis
is a condition in which the body is fighting a severe infection that has spread via the bloodstream.

(6)

Acute
renal dysfunction is a rapid loss of kidney function. Computed tomography (CT) with contrast is used for the
assessment of possible device infection resulted in acute renal dysfunction.

(7)

The
2 patient increase from 6 months to 12 months were noncompliant due to approximately 20% driver usage.
Patients participating in our feasibility trial were advised to keep the C-Pulse System on for at least 80% of each day. Our 12 month rehospitalization rate of 15% compares to a recent
study control group rehospitalization rate of over 40% at 6 months (n=280),

which
included NYHA Class III patients who had been previously hospitalized for heart failure. We believe that this population is similar to the majority of patients profiled in our feasibility
study and our planned IDE study with the exception of NYHA Class IV ambulatory.

We believe the results of the six-month and 12-month follow-up demonstrate the feasibility of the
C-Pulse System implantation procedure and provide indications of safety and efficacy of the C-Pulse System in patients with moderate to severe heart failure necessary to
proceed with a pivotal trial. In March 2012, the FDA notified us that it completed its review of the C-Pulse System feasibility trial data, concluded we met the applicable agency
requirements, and indicated that we can move forward with an IDE application.

We
submitted our pre-IDE in March 2012 and expect to submit an application for an IDE to the FDA in the second half of 2012 for approval to initiate our U.S. pivotal trial.
Once the IDE application has been filed, the FDA, following its review, will notify us that the IDE application has been either unconditionally approved, approved with certain conditions or that there
exist deficiencies in the application that must be addressed prior to approval. If the FDA identifies deficiencies, we will be provided the opportunity to submit additional information to the FDA to
respond to the filing deficiencies. It is common for the FDA to require additional information before approving an IDE. We currently anticipate that we will
have pivotal trial IDE approval in 2012, begin enrollment promptly thereafter, and complete our pivotal trial enrollment by the end of 2015.

Research and Development

Our research and development expense totaled $4.0 million for the six months ended June 30, 2012, and
$11.2 million and $6.2 million for the years ended December 31, 2011 and 2010, respectively. Research and development costs include activities related to research, development,
design, testing and manufacturing of prototypes of our system as well as costs associated with certain clinical and regulatory activities.

Since
completing our 20 patient North American feasibility trial, we have made several improvements to the C-Pulse System based on the patient outcomes and feedback we
received from surgeons and patients during the trial. Some of these changes and enhancements to our C-Pulse System, all of which have been completed and can be utilized in our planned
pivotal trial, include the following:



Our next generation driver has been modified to be lighter, smaller, and quieter than our previous C-Pulse
System driver. We expect the lighter and smaller C-Pulse System driver will be easier for patients to carry with them while they are receiving therapy, and we believe a quieter
C-Pulse System will reduce the inconvenience for patients, and will encourage them to utilize the C-Pulse System at higher rates. This modified driver is already being used by
three existing patients in Canada, and they have provided positive feedback to date.



Our C-Pulse cuff has been enhanced so that the cuff is now designed with sutures already in place. We believe
this pre-sutured cuff will allow surgeons to implant the C-Pulse System more quickly and easily via a minimally invasive procedure.



Our PIL, which connects the internal portion of the C-Pulse System with the external driver, has been
redesigned to address some instances of PIL wear experienced in our feasibility trial. After enhanced testing performed on the updated PIL, we believe the more robust design will alleviate wear
concerns in future implants, improving the safety and reliability of the C-Pulse System for patients. Three patients in the United States and Canada have been implanted with the modified
PIL and we have experienced positive results to date.



We have introduced a C-Patch mechanism to better secure the PIL at the site from which it exits the patient.
Because the C-Pulse System allows patients to disconnect for certain activities, we believe the PIL exit site is more likely to become infected because of the PIL movement caused by

patients
disconnecting. The C-Patch was developed to reduce the PIL movement during the process of disconnecting the C-Pulse System, which we anticipate will help minimize
future patient infections at the PIL exit site.

We
also completed an initial animal study of a next-generation, fully implantable C-Pulse System in June 2011. This next-generation system
would be powered by a wireless, external battery unit, with the power driver and cuff implanted in the patient's body. A fully implantable system would eliminate the need for wires to breach the
patient's skin, reducing the risk of infection and increasing the patient's comfort. The study resulted in an increase to the animal's heart function. While we continue to focus on commercializing our
current C-Pulse System, we believe development of a next-generation, fully implantable C-Pulse System would benefit our business and prospects.

We
expect our research and development expenses to increase as we continue to conduct clinical trials and perform research and developments to our C-Pulse System, such as the
development of a fully implantable system.

Sales and Marketing

To date, all of our sales of the C-Pulse System have been to U.S. hospitals and clinics pursuant to research arrangements
and with appropriate regulatory approvals for sales in conjunction with our feasibility clinical trial. We have solicited hospitals and clinics for our trials through our employees, selecting
hospitals and clinics for participation in our trials based on our assessment of their expertise in the area of moderate and severe heart failure and their understanding of our system. Enrollment in
our North American feasibility clinical trial was completed in the first half of 2011 and we did not generate any revenue from sales of our system during 2011. We expect to commence our pivotal
clinical trial in the second half of 2012, which is projected to extend to the end of 2015. We do not expect to market our system in the United States before 2017.

We
obtained CE Mark approval in July 2012 and intend to market our system in Europe in the second half of 2012. The degree and timing of any commencement or expansion of sales in Europe,
however, cannot be predicted with certainty. We have retained consultants to analyze the conditions in various European countries for potential reimbursement for our system and the capabilities of
existing hospitals and clinics to implant the C-Pulse System properly and understand the potential benefits of our system. We initially plan to sell our system in Germany and Italy, which
we believe are currently the largest potential European markets for our system and have supported reimbursement for heart failure technologies in the past. We have not obtained approval for
reimbursement in any European country. We initially plan to sell the C-Pulse System in Europe through experienced distributors. We also intend to leverage the CE Mark approval to enter
other targeted markets throughout the world, although the timing for our entry into other markets is uncertain and will depend on, among other factors, the success of our initial sales efforts in
Europe, our ability to obtain regulatory approval and funding, the results of our pivotal clinical trials and the other factors described under "Risk Factors" and elsewhere in this prospectus.

Manufacturers and Suppliers

The C-Pulse System is currently implanted only in connection with clinical trials. We outsource the manufacture of our
system to suppliers with our activities directed toward supply chain management and distribution of our system to clinics and hospitals. A number of critical components of our C-Pulse
System, including the balloon, driver unit, cuff and interface lead are provided by outside suppliers and tested by us in-house. Our suppliers include large and small U.S.-based
manufacturers of medical device components. The components for our system do not require significant customization for use in our system or necessitate

any
raw materials for which we believe our suppliers could not readily find alternative sources. We purchase from our suppliers primarily on a purchase order basis. We do not "second source" any
components of our system, although we believe we could find alternative suppliers for each component of our system, other than the balloon, without materially interrupting production of our system at
current levels. If the manufacturer of the balloon used in our system was unwilling or unable to supply this component for any reason, however, our business could be adversely affected. If we obtain
regulatory approvals necessary to commercialize our C-Pulse System, all of our outsourced manufacturers will need to increase their production of our system or we will need to develop
capabilities to manufacture the system ourselves.

Intellectual Property

We have established an intellectual property portfolio through which we seek to protect our system and technology. As of
June 30, 2012, our portfolio consisted of 35 issued patents, of which 12 were issued in the United States and 23 were issued in other countries. We also had 23 patent applications pending,
including 8 in the United States as of that date. Our patents and patent applications cover various aspects of both the methodology as well as the design of the C-Pulse System device and
related components.

We
have developed technical knowledge that, although non-patentable, we consider to be significant in enabling us to compete. It is our policy to enter into confidentiality
agreements with each of our employees and consultants prohibiting the disclosure of any confidential information or trade secrets. In addition, these agreements provide that any inventions or
discoveries by employees and consultants relating to our business will be assigned to us and become our sole property.

Despite
our patent rights and policies with regard to confidential information, trade secrets and inventions, we may be subject to challenges to the validity of our patents, claims that
our system infringes the patent rights of others and the disclosure of our confidential information or trade secrets. These and other risks are described more fully under the heading "Risks Relating
to our Intellectual Property" in the "Risk Factors" section of this prospectus.

At
this time we are not a party to any material legal proceedings that relate to patents or proprietary rights.

Competition

Competition from medical device companies and medical device divisions of health care companies, pharmaceutical companies and
gene- and cell-based therapies is intense and is expected to increase. The vast majority of Class III and Class IV heart failure patients still receive
pharmacological treatment and a smaller percentage are treated with LVADs and other medical devices. We are not aware of any direct competitors that offer devices residing outside the vascular system
for treatment of Class III and ambulatory Class IV heart failure, and therefore we continue to expect new competitors both from the pharmacological and the medical device space. Among
the other medical device competitors that treat or may treat in the future Class III or ambulatory Class IV heart failure patients are AbioMed, Inc., Berlin Heart GmbH, CardioKinetix,
Inc., CircuLite, Inc., HeartWare International Inc., Jarvik Heart, Inc., MicroMed Technology, Inc., SynCardia Systems, Inc., Terumo Heart, Inc. and Thoratec Corporation, as well as a range of other
specialized medical device companies with devices at varying stages of development. Some of these competitors are larger than we are and have significantly greater financial resources and name
recognition than we do. Our system has been implanted in a limited number of individuals to date and the efficacy and potential competitive disadvantages of the C-Pulse System are not
fully known at this time.

Our ability to compete effectively depends upon our ability to distinguish our company and our system from our competitors and their products. Factors affecting
our competitive position include:



financial resources;



product performance and design;



product safety;



acceptance of our system in the marketplace;



sales, marketing and distribution capabilities;



manufacturing and assembly costs;



pricing of our system and of our competitors' products;



the availability of reimbursement from government and private health insurers;



success and timing of new product development and introductions;



regulatory approvals in the United States; and



intellectual property protection.

We
believe the C-Pulse System's lower risk profile resulting from its position outside a patient's vascular system, the ability to temporarily disconnect the
C-Pulse System without harm to the patient, and the minimally invasive manner in which the C-Pulse System can be implanted would help our system effectively compete in the
markets where it is approved for sale.

Third-Party Reimbursement

If approved in the United States, the C-Pulse System is expected to be purchased primarily by customers, such as hospitals,
who then would bill various third-party payors for the services provided to the patients. These payors, which include federal health care programs
(e.g., Medicare and Medicaid), state health care programs, private health insurance companies and managed care organizations, would then reimburse our
customers based on established payment formulas that take into account part or all of the cost associated with these devices and the related procedures performed.

The
agency responsible for administering the Medicare program, the Centers for Medicare & Medicaid Services, and a majority of private insurers have approved reimbursement for our
C-Pulse System in clinical trials. The FDA has assigned the C-Pulse System to a Category B designation under IDE number G070096. By assigning the
C-Pulse System a Category B designation, the FDA determined that the C-Pulse System is non-experimental/investigational. A
non-experimental/investigational device refers to a device believed to be in Class I or Class II, or a device believed to be in Class III for which the incremental
risk is the primary risk in question (that is, underlying questions of safety and effectiveness of that device type have been resolved), or it is known that the device type can be safe and effective
because, for example, other manufacturers have obtained FDA approval for that device type.

With
an IDE number assigned, providers are allowed to seek coverage and reimbursement for the C-Pulse System under the Medicare program from their Medicare fiscal
intermediary for hospital services, carrier for physician services or Medicare Administrative Contractor for both services. There can be no assurance, however, that fiscal intermediaries or Medicare
Administrative Contractors will make payment.

We
are analyzing the potential for third-party reimbursement in various European countries. Third-party reimbursement requirements vary from country to country in Europe and we are not
approved for reimbursement in any European country at this time. Health care laws in the United States and other

countries
are subject to ongoing changes, including changes to the amount of reimbursement for hospital services. Legislative proposals can substantially change the way health care is financed by both
governmental and private insurers and may negatively impact payment rates for our system. Also, from time to time there are a number of legislative, regulatory and other proposals both at the federal
and state levels;
it remains uncertain whether there will be any future changes that will be proposed or finalized and what effect, if any, such legislation or regulations would have on our business. However, in the
United States and international markets, we expect that both government and third-party payors will continue to attempt to contain or reduce the costs of health care by challenging the prices charged,
or deny coverage, for health care products and services.

Government Regulations

Regulation by governmental authorities in the United States and foreign countries is a significant factor in the manufacture and
marketing of our current system and any future products and in our ongoing research and development activities. All of our proposed products will require regulatory approval prior to
commercialization. In particular, medical devices are subject to rigorous pre-clinical testing as a condition of approval by the FDA and by similar authorities in foreign countries.

United States

In the United States, the FDA regulates the design, manufacture, distribution and promotion of medical devices pursuant to the Federal
Food, Drug and Cosmetic Act, or FDCA, and its regulations. Our C-Pulse System is regulated as a medical device. To obtain FDA approval to market the C-Pulse System, the FDA
requires proof of safety and efficacy in human clinical trials performed under an IDE. An IDE application must contain pre-clinical test data supporting the safety of the product for human
investigational use, information on manufacturing processes and procedures, proposed clinical protocols and other information. If the IDE application is approved, human clinical trials may begin. The
trials must be conducted in compliance with FDA regulations and with the approval of institutional review boards. Clinical trials are subject to central registration requirements. The results obtained
from these trials are submitted to the FDA in support of a premarket approval, or PMA, application.

Products
must be manufactured in registered establishments and must be manufactured in accordance with Quality System Regulations, or QSR. Furthermore, the FDA may at any time inspect
our facilities or the facilities of our suppliers to determine whether we or our suppliers comply with FDA regulations, including the QSR, which requires manufacturers to follow stringent design,
testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process.

We
and our suppliers are also subject to regulation by various state authorities, which may inspect our or our suppliers' facilities and manufacturing processes and enforce state
regulations. Failure to comply with applicable state regulations may result in seizures, injunctions or other types of enforcement actions.

Health Care Regulation

Our business is subject to extensive federal and state government regulation. This includes the federal Anti-Kickback
Statute and similar state anti-kickback laws, the federal False Claims Act and similar state false claims laws, and the Health Insurance Portability and Accountability Act of 1996, or
HIPAA, the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act,
and similar state laws addressing privacy and security. Although we believe that our operations materially comply with the laws governing our industry, it is possible that non-compliance
with existing laws or the adoption of new laws or interpretations of existing laws could adversely affect our financial performance.

The health care industry is subject to extensive federal and state regulation. In particular, the federal Anti-Kickback
Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the
furnishing, recommending or arranging for a good or service, for which payment may be made under a federal health care program such as the Medicare and Medicaid programs. The definition of
"remuneration" has been broadly interpreted to include anything of value, including, for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash,
waivers of payments, ownership interests and providing anything at less than its fair market value. The Patient Protection and Affordable Care Act revises the evidentiary standard under the
Anti-Kickback Statute and eliminates the requirement of actual knowledge, or specific intent, to commit a violation of the statute. This amendment to the Anti-Kickback Statute may improve the
government's ability to meet its evidentiary burden for establishing liability. The penalties for violating the Anti-Kickback Statute can be severe. These sanctions include criminal
penalties and civil and administrative sanctions, including fines, imprisonment and possible administrative action for suspension or exclusion from the Medicare and Medicaid programs.

The
Anti-Kickback Statute is broad, and it prohibits many arrangements and practices that are lawful in businesses outside of the health care industry. Recognizing that the
Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements within the health care industry, the U.S. Department of Health and Human Services
issued regulations in July of 1991, which the Department has referred to as "safe harbors." These safe harbor regulations set forth certain provisions which, if met in form and substance, will assure
health care providers and other parties that they will not be prosecuted under the federal Anti-Kickback Statute. Additional safe harbor provisions providing similar protections have been
published intermittently since 1991. Our arrangements with physicians, physician practice groups, hospitals and other persons or entities who are in a position to refer may not fully meet the
stringent criteria specified in the various safe harbors. Conduct and business arrangements that do not fully satisfy one of these safe harbor provisions may result in increased scrutiny or
enforcement actions by government enforcement authorities such as the U.S. Department of Health and Human Services Office of Inspector General.

Many
states have adopted laws similar to the federal Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for health care services reimbursed
by any source, not only federal health care programs. Although we believe that we comply with both federal and state anti-kickback laws, any finding of a violation of these laws could
subject us to criminal and civil and administrative penalties or possible administrative action for suspension or exclusion from federal or state health care programs. Such penalties would adversely
affect our financial performance and our ability to operate our business.

HIPAA
created new federal statutes to prevent health care fraud and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully
executing a scheme to defraud any health care benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government
sponsored programs such as the Medicare and Medicaid programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any
materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. A violation of this statute is a felony and may result
in fines or imprisonment or administrative action for suspension or exclusion from government sponsored programs. Both federal and state government agencies are continuing heightened and coordinated
civil and criminal enforcement efforts. As part of announced enforcement agency work plans, the federal government will continue to scrutinize, among other things, the billing practices of hospitals
and other providers of health care services. The federal government also has increased funding to fight health

care
fraud, and it is coordinating its enforcement efforts among various agencies, such as the U.S. Department of Justice, the Office of Inspector General and state Medicaid fraud control units. We
believe that the health care industry will continue to be subject to increased government scrutiny and investigations.

Federal False Claims Act

Another trend affecting the health care industry is the increased use of the federal False Claims Act and, in particular, actions under
the False Claims Act's "relator" or "whistleblower" provisions. Those provisions allow a private individual to bring actions on behalf of the government alleging that the defendant has defrauded the
federal government. After the individual has initiated the lawsuit, the government must decide whether to intervene in the lawsuit and to become the primary prosecutor. If the government declines to
join the lawsuit, then the individual may choose to pursue the case alone, in which case the individual's counsel will have primary control over the prosecution, although the government must be kept
apprised of the progress of the lawsuit. Whether or not the federal government intervenes in the case, it will receive the majority of any recovery. If the litigation is successful, the individual is
entitled to no less than 15%, but no more than 30%, of whatever amount the government recovers. The percentage of the individual's recovery varies, depending on whether the government intervened in
the case and other factors. Recently, the number of suits brought against health care providers by private individuals has increased dramatically. In addition, most states have enacted or are
considering enacting laws modeled after the federal False Claims Act. Under the Deficit Reduction Act of 2005, states are being encouraged to adopt false claims acts similar to the federal False
Claims Act, which establish liability for submission of fraudulent claims to the State Medicaid program and contain whistleblower provisions. Even in instances when a whistleblower action is dismissed
with no judgment or settlement, we may incur substantial legal fees and other costs relating to an investigation. Future actions under the False Claims Act may result in significant fines and legal
fees, which would adversely affect our financial performance and our ability to operate our business.

Further,
the Fraud Enforcement and Recovery Act of 2009 expands the types of entities and conduct subject to the False Claims Act. We strive to ensure that we meet applicable regulatory
requirements and guidance. However, the costs of defending claims under the False Claims Act, as well as sanctions imposed under the Act, could significantly affect our financial performance.

The
HITECH Act of the American Recovery and Reinvestment Act of 2009, signed into law on February 17, 2009, dramatically expanded, among other things, (1) the scope of
HIPAA to also include "business associates," or independent contractors who receive or obtain protected health information in connection with providing a service to the covered entity,
(2) substantive security and privacy obligations, including new federal security breach notification requirements to affected individuals and Department of Health and Human Services and
potentially media outlets, (3) restrictions on marketing communications and a prohibition on covered entities or business associates from receiving remuneration in exchange for protected health
information and (4) the civil and criminal penalties that may be imposed for HIPAA violations, increasing the annual cap in penalties from $25,000 to $1.5 million per year. We believe we
are neither a HIPAA-defined "covered entity" nor a "business associate," and therefore are not presently subject to HIPAA's privacy and security standards. It is possible that future changes in our
operations or the law could subject us to HIPAA's privacy and security requirements and penalty provisions if we failed to comply. In addition to federal regulations issued under HIPAA, some states
have enacted privacy and

security
statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases it may be necessary to modify our operations and procedures to comply with the
more stringent state laws, which may entail significant and costly changes for us. We believe that we are in compliance with such state laws and regulations. However, if we fail to comply with
applicable state laws and regulations, we could be subject to additional sanctions.

In March 2010, Congress enacted the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, or
together, the Affordable Care Act. In 2013, manufacturers are scheduled to begin paying an excise tax on sales of medical devices. Medicare is also implementing a competitive bidding system for
durable medical equipment.

The
Affordable Care Act also includes provisions known as the Physician Payments Sunshine Act, which requires manufacturers of drugs, biologics, devices and medical supplies covered
under Medicare and Medicaid starting in 2012 to record any transfers of value to physicians and teaching hospitals and to report this data beginning in 2013 to the Centers for Medicare and Medicaid
Services for subsequent public disclosure. Manufacturers must also disclose investment interests held by physicians and their family members. Similar reporting requirements have also been enacted on
the state level domestically, and an increasing number of countries worldwide either have adopted or are considering similar laws requiring transparency of interactions with health care professionals.
In addition, some states such as Massachusetts
and Vermont impose an outright ban on certain gifts to physicians. Violations of these laws may result in civil or criminal fines and/or penalties.

International Regulations

We are also subject to regulation in each of the foreign countries where we intend to conduct clinical research and distribute the
C-Pulse System. These regulations relate to product standards, packaging and labeling requirements, import restrictions, tariff regulations, duties, tax requirements, and anti-bribery
prohibitions. Many of the regulations applicable to our system in these countries are similar to those of the FDA. The national health or social security organizations of certain countries require our
system to be qualified before they can be marketed in those countries.

The
primary regulatory environment in Europe is that of the European Union, which consists of 27 member states. The European Union has adopted two directives that cover medical
devicesDirective 93/42/EEC covering medical devices and Directive 90/385/EEC for active implantable medical devices, as well as numerous standards that govern and harmonize the national
laws and standards regulating the design, manufacture, clinical trials, labeling, adverse event reporting and post-market surveillance activities for medical devices that are marketed in
member states. Medical devices that comply with the requirements of the national law of the member state in which they are first marketed will be entitled to bear CE Marking, indicating that the
device conforms to applicable regulatory requirements, and, accordingly, can be commercially marketed within European Union states and other countries that recognize this mark for regulatory purposes.
We obtained CE Marking for the C-Pulse System in July 2012.

Anti-Corruption/Anti-Bribery Laws

To the extent we commence commercial operations overseas, we will be subject to the FCPA and other countries'
anti-corruption/anti-bribery regimes, such as the U.K. Bribery Act. The FCPA prohibits improper payments or offers of payments to foreign governments and their officials for
the purpose of obtaining or retaining business. Safeguards we implement to discourage improper payments or offers of payments by our employees, consultants, sales agents or distributors may be
ineffective, and violations of the FCPA and

similar
laws may result in severe criminal or civil sanctions, or other liabilities or proceedings against us, any of which would likely harm our reputation, business, financial condition and result
of operations.

Other Regulations

We are also subject to various federal, state and local laws and regulations relating to such matters as safe working conditions,
laboratory and manufacturing practices and the use, handling and disposal of hazardous or potentially hazardous substances used in connection with our research and development and manufacturing
activities. Specifically, the manufacture of our biomaterials is subject to compliance with federal environmental regulations and by various state and local agencies. Although we believe we are in
compliance with these laws and regulations in all material respects, we cannot provide assurance that we will not be required to incur significant costs to comply with environmental laws or
regulations in the future.

Employees

As of June 30, 2012 we had 25 employees, consisting of 23 full-time and two part-time employees. None of
our employees are covered by a collective bargaining agreement. We consider relations with our employees to be good.

Properties

We lease a 10,000 square foot facility in Eden Prairie, Minnesota that previously housed our corporate headquarters and substantially
all of our functional areas, with the exception of a portion of our research and development activities. The lease expires September 30, 2012 and requires a monthly payment of approximately
$11,000. On October 21, 2011 we entered into a lease for a 23,000 square foot facility also located in Eden Prairie, Minnesota. The lease period commenced December 1, 2011 and extends
through March 31, 2016. This facility houses substantially all of our
functional areas and replaced our corporate headquarters previously located at the other facility we lease in Eden Prairie. Monthly rent and electricity for our new headquarters total approximately
$21,000.

The following table sets forth information concerning our directors and executive officers as of July 27, 2012:

Name

Age

Position

David Rosa

48

Director; Chief Executive Officer

Kevin Bassett

44

Senior Vice President, Technology & Operations

Debra Kridner

60

Vice President Research & Regulatory Affairs

Jim Yearick

50

Vice President Marketing & Sales

Jeffrey Mathiesen

51

Chief Financial Officer and Secretary

Nicholas Callinan

66

Chairman of the Board, Director

Paul Buckman

56

Director

Dr. Geoffrey Brooke

56

Director

Dr. Mark Harvey

46

Director

Donal O'Dwyer

59

Director

Dr. William Peters

46

Director; Chief Technical Officer & Medical Director

Gregory Waller

62

Director

Executive Officers

David Rosa: Mr. Rosa is our Chief Executive Officer, a position he has held since November 2009. From 2008 to November 2009,
Mr. Rosa
served as the Chief Executive Officer of Milksmart, Inc., a medical device company that specializes in medical devices for animals. From 2004 to 2008, Mr. Rosa served as the Vice President of
Global Marketing for cardiac surgery and cardiology for St. Jude Medical.

Kevin Bassett: Mr. Basset is our Senior Vice President of Technology and Operations, a position he has held since January 2012. From
October
2010 until December 2011, Mr. Bassett served as our Vice President of Research, Development and Quality Assurance. Prior to joining to Sunshine Heart, Inc., Mr. Bassett served in various
leadership roles at Acorn Cardiovascular, a medical device company that develops treatments for patients with heart failure, the most recent position being as Senior Vice President from 2006 to 2010.

Debra Kridner: Ms. Kridner is our Vice President of Clinical Research and Regulatory Affairs, a position she has held since November
2009 on a
consultant basis and since March 2010 as an employee of our company. From 2008 to 2009, Ms. Kridner worked as a consultant for her company Kridner Consulting LLC, which performed consulting
services for medical device companies. From 2004 to 2008, Ms. Kridner served as the Vice President of Clinical Research, Quality and Regulatory Affairs for St. Jude Medical's Cardiac
Surgery and Interventional Cardiology for the Cardiovascular Division.

Jeffrey Mathiesen: Mr. Mathiesen has served as our Chief Financial Officer since March 2011 and as our Secretary since July 2011. From
December 2005 through April 2010, Mr. Mathiesen served as Vice President and Chief Financial Officer for Zareba Systems, Inc., a manufacturer and marketer of medical products, perimeter fencing
and security systems. Zareba was a publicly traded company that was purchased by Woodstream Corporation in April 2010. Previous positions held by Mr. Mathiesen include Vice President and Chief
Financial Officer positions with publicly traded companies dating back to 1993.

William Peters: Dr. Peters has served as our Chief Technical Officer and Medical Director since 2002. In addition to his role within our
company, Dr. Peters is an honorary clinical research fellow with the Green Lane Cardiothoracic Surgical Unit at Auckland City Hospital in New Zealand.

Jim Yearick: Mr. Yearick has served as our Vice President of Marketing and Sales since September 2011. From 2008 to September 2011,
Mr. Yearick served as Vice President of Global Product Marketing for Medtronic's
Cardiac Rhythm Management division. Previously, from 2005 to 2008, Mr. Yearick served as Vice PresidentAsia for Medtronic's Cardiac Rhythm Management division.

Board of Directors

Nicholas Callinan: Director since July 2008. Mr. Callinan is the chairman of our board of directors. Since 2004, he has served as
Principal at
Collins Hill Pty Ltd., a private equity advisory and consulting firm. From 2001 to 2003, Mr. Callinan served as the Senior Vice President and Chief Executive of Structured Investment Vehicles
for Shell Internet Ventures, a company that invested in information technology companies worldwide. Previously, Mr. Callinan served as the Managing Director and Chief Executive of Central and
Eastern European funds for Advent International Corporation, a company focused on private equity and venture capital fund management and investment. Mr. Callinan founded the venture capital and
private equity funds management company, Advent Management Group Pty. Ltd. and was Chief Executive of that company and a number of funds it managed, some of which were listed on the Australia
Securities Exchange, or ASX. Earlier in his career, Mr. Callinan was a civil engineer in Australia and France and worked with Cummins Engine Company, Inc. in the United States and Australia.

Mr. Callinan's
qualifications to serve on our board of directors include his experience as a Chief Executive Officer, a fund manager, and a board member for private companies
throughout the world. In these roles, Mr. Callinan has aided numerous companies in developing their governance structure.

Geoff Brooke: Director since September 2003. Dr. Brooke is managing director of GBS Venture Partners, an Australian venture capital firm
that
seeks out investments in life sciences companies. Dr. Brooke founded the venture capital firm in October 1996.

Dr. Brooke's
qualifications to serve on our board of directors include his experience in financial matters and fund raising as a fund manager and his experience with clinical
medicine.

Paul Buckman: Director since February 2011. Mr. Buckman has served as the President and Chief Executive
Officer of Sentreheart, Inc., a medical technology company focused on closure of various anatomic structures, since February 2012. Mr. Buckman served as Chief Executive Officer and
Director of Pathway Medical Technologies, Inc., a medical device company focused on treatment of peripheral arterial disease from September 2008 to February 2012. From December 2006 until September
2008, Mr. Buckman served as Chief Executive Officer of Devax, Inc., a developer and manufacturer of drug eluting stents, while also serving as Chairman of the Board of Directors for Pathway
Medical Technologies, Inc. From August 2004 to December 2006, Mr. Buckman served as President of the Cardiology Division of St. Jude Medical, Inc., a diversified medical products
company. Prior to joining St. Jude Medical, Mr. Buckman served as Chairman of the Board of Directors and Chief Executive Officer of ev3, LLC, a Minnesota-based medical device
company focused on endovascular therapies that Mr. Buckman founded and developed into an $80 million business, from January 2001 to January 2004. Mr. Buckman has worked in the
medical device industry for over 30 years, including 10 years at Scimed Life Systems, Inc. and Boston Scientific Corporation, where he held several executive positions before becoming
President of the Cardiology Division of Boston Scientific in January 2000. In addition to Pathway Medical Technologies, Inc., Mr. Buckman also currently serves as a Director for SentreHeart,
Inc., Conventus Orthopaedics, Inc., and

also
as a Business Advisory Board member for Bio Star Ventures. In the past, Mr. Buckman has served on the boards of Velocimed, Inc., where he was a co-founder, EndiCor, Inc.,
Microvena, Inc., and Micro Therapeutics, Inc.

Mr. Buckman's
qualifications to serve on our board of directors include his extensive experience in the management of medical device companies, including his collective eleven
years of experience as a Chief Executive Officer for Pathway Medical and Devax, Inc.

Mark Harvey: Director since September 2011. Dr. Harvey has served as a partner of CM Capital Investments Pty Ltd, an Australian venture
capital firm that focuses on life sciences, telecommunications, information technology, and renewable energy ventures, since 2006. In this role, Dr. Harvey has gained extensive experience in
the formation, fund raising, and management of numerous life science companies.

Dr. Harvey's
qualifications to serve on our board of directors include his extensive experience in the life sciences industry and general business experience due to his board
service for other medical technology companies such as Osprey Medical Inc. since June 2007, and Pathway Therapeutics Ltd. since July 2010.

Donal O'Dwyer: Director since July 2004. Mr. O'Dwyer retired as worldwide President of Cordis Cardiology, the cardiology division of the
Johnson & Johnson subsidiary, in 2003. Cordis is a developer and manufacturer of breakthrough stents, catheters and guidewires for interventional medicine, minimally invasive computer-based
imaging, and electrophysiology. Prior to joining Cordis, Mr. O'Dwyer served as President of the Cardiovascular Group, Europe of Baxter International Inc., a global health care company that uses
its expertise in medical devices, pharmaceuticals and biotechnology to create products that advance patient care worldwide.

Mr. O'Dwyer's
qualifications to serve on our board of directors include his extensive experience in the medical technology industry and general business experience due to his
board service for other medical technology companies such as Angioblast Systems Inc. from November 2004 to January 2011, Atcor Medical Holdings Ltd since July 2004, Cochlear Limited since August 2005,
and Mesoblast Ltd. since November 2004.

William Peters: Director since August 2002. Dr. Peters has served as our Chief Technical Officer and Medical Director since 2002. In
addition
to his role within our company, Dr. Peters is an honorary clinical research fellow with the Green Lane Cardiothoracic Surgical Unit at Auckland City Hospital in New Zealand.

Dr. Peters'
qualifications to serve on our board of directors include his extensive experience with and expertise in cardiac medical technology, including his invention and
development of devices and methods to achieve minimally cardiac surgery and his recognition in our industry gained from his authorship of numerous published articles regarding cardiac surgery and
heart failure.

David Rosa: Director since July 2010. Mr. Rosa is our Chief Executive Officer, a position he has held since November 2009. From 2008 to
November 2009, Mr. Rosa served as the Chief Executive Officer of Milksmart, Inc., a medical device company that specializes in medical devices for animals. From 2004 to 2008, Mr. Rosa
served as the Vice President of Global Marketing for cardiac surgery and cardiology for St. Jude Medical.

Mr. Rosa's
qualifications to serve on our board of directors include his experience in the medical device industry and his previous leadership experiences within medical device
companies.

Gregory Waller: Director since August 2011. Mr. Waller has been employed as the Chief Financial Officer of Ulthera, Inc. since October
of
2011. Ulthera is a medical device company specializing in non-invasive facelifts using an ultrasound medical device. From 2006 to 2011, Mr. Waller was the Chief Financial Officer
and Treasurer of Universal Building Products, Inc., which was a manufacturer of concrete forms and accessories for the residential and commercial projects in North America. Mr. Waller
previously served as the Vice President of Finance, Chief Financial Officer, and Treasurer for Sybron Dental Specialties, Inc., a manufacturer of high technology dental, dental implant, and infection
prevention products, from 1980 to 2005. Mr. Waller has served on the board of directors of Endologix Inc. since 2003. Mr. Waller also served on the board of directors of Clarient, Inc.
and SenoRx, Inc. from 2006 until 2010. From 2006 to 2009, Mr. Waller served as a member of the board of directors of Alsius, Inc., and from 2009 to 2010, he served as a member of the board of
directors of Biolase, Inc. In addition, Mr. Waller served on the board of Cardiogenesis from 2007 until 2011.

Mr. Waller's
qualifications to serve on our board of directors include his 37 years of financial and management experience, including his experiences as a Chief Financial
Officer for Universal Building Products, Inc. and Sybron Dental Specialties, Inc., and his familiarity with public company board functions from his services on the boards of other public companies.

As
described above, Mr. Waller was the Chief Financial Officer and Treasurer of Universal Building Products from 2006 to 2011. Universal Building Products filed a voluntary
petition for bankruptcy on August 4, 2010. Except as described in the preceding sentence, no other event has occurred during the past ten years requiring disclosure pursuant to
Item 401(f) of Regulation S-K.

Board Composition

Our board of directors is divided into three classes with staggered three-year terms. At each annual general meeting of
stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Our directors
are divided among the three classes as follows:



The Class II directors are Dr. Brooke and Mr. Rosa and their terms expire at this year's annual
meeting of stockholders;



The Class III directors are Messrs. Callinan, O'Dwyer and Waller and their terms expire at the annual
meeting of stockholders to be held in 2013; and



The Class I directors are Dr. Peters, Mr. Buckman and Dr. Harvey and their terms expire at the
annual meeting of stockholders to be held in 2014.

Any
additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of
one-third of the directors.

Director Independence

Our board of directors currently consists of eight directors. Our board of directors has determined that six of our eight directors are
independent directors, as defined under the applicable rules of the Nasdaq Stock Market. The independent directors are Messrs. Buckman, Brooke, Callinan, Harvey, O'Dwyer, and Waller.

There
is no family relationship between any director, executive officer or person nominated to become a director or executive officer.

The board of directors has established an audit committee, a compensation committee and a governance and nominating committee. Each of
our committees has a charter and each charter is posted on our website. The following sets forth the membership of each of our committees.

Director

Audit Committee

Compensation
Committee

Governance and
Nominating Committee

Geoffrey Brooke

X

Paul Buckman

Chair

X

Nicholas Callinan

X

X

X

Mark Harvey

X

Donal O'Dwyer

X

Gregory Waller

Chair

Chair

Audit Committee

Among other matters, our audit committee:



evaluates the qualifications, performance and independence of our independent auditor and reviews and approves both audit
and nonaudit services to be provided by the independent auditor;



discusses with management and our independent auditors any major issues as to the adequacy of our internal controls, any
actions to be taken in light of significant or material control deficiencies and the adequacy of disclosures about changes in internal control over financial reporting;



establishes procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting
controls or auditing matters, including the confidential, anonymous submission by employees of concerns regarding accounting or auditing matters;



administers our investment and cash management policies; and



prepares the audit committee report that SEC rules require to be included in our annual proxy statement and annual report
on Form 10-K.

Each
of the members of our audit committee meets the requirements for financial literacy under the applicable rules and regulations of the SEC and the Nasdaq Stock Market. Our board of
directors has determined that Mr. Waller is our audit committee financial expert, as defined under the applicable rules of the SEC. Each member of our audit committee satisfies the Nasdaq Stock
Market independence standards and the independence standards of Rule 10A-3(b)(1) of the Exchange Act.

Compensation Committee

Our compensation committee reviews and approves on an annual basis the goals and objectives relevant to our Chief Executive Officer's
compensation and annually reviews the evaluation of the performance of our executive officers and approves our executive officers' annual compensation.

Governance and Nominating Committee

Our governance and nominating committee identifies individuals qualified to become members of the board of directors, recommends
individuals to the board for nomination as members of the board and board committees, and oversees the evaluation of our board of directors.

We have adopted a Code of Business Conduct and Ethics relating to the conduct of our business by our directors, officers and employees,
which is posted on our website at www.sunshineheart.com/corporate-governance.

Director Compensation

The following table sets forth certain information regarding compensation of each person who served as one of our
non-employee directors during the fiscal year ended December 31, 2011. During the fiscal years ended June 30, 2011 and December 31, 2011, we did not provide any
separate compensation to our directors who were also employees. Historically, our fiscal years consisted of 12-month periods ending June 30. In September 2011, we changed our fiscal
year to coincide with the calendar year. As a result, June 30, 2011 was our last fiscal year to end on June 30, we had a six-month fiscal year that began on July 1,
2011 and ended on December 31, 2011, and all future fiscal years will begin on January 1 and end on December 31 of that year.

Name

Fiscal Year Ended

Fees Earned or
Paid in Cash
($)

Option
Awards
($)(1)

Total
($)

Geoffrey Brooke(2)

12/31/11

12,649

73,445

86,094

6/30/11







Paul Buckman

12/31/11

25,963

76,626

102,589

6/30/11

19,542



19,542

Nicholas Callinan

12/31/11

51,375

125,939

177,314

6/30/11

103,234



103,234

Dr. Mark Harvey(3)

12/31/11

12,649

76,887

89,536

6/30/11







Crispin Marsh(4)

12/31/11

8,129

73,445

81,574

6/30/11

50,853



50,853

Donal O'Dwyer

12/31/11

12,649

73,445

86,094

6/30/11

49,941



49,941

Gregory Waller(5)

12/31/11

21,042

74,784

95,826

6/30/11







(1)

Represents
the grant date fair value of the awards granted during the period computed in accordance with FASB ASC Topic 718. For a
discussion of the relevant assumptions used to determine the valuation of our option awards for accounting purposes please refer to Note 3 to the Notes to Consolidated Financial Statements
included in this prospectus.

(2)

Dr. Brooke
is required to transfer the compensation he receives for service on our board of directors to venture capital funds
affiliated with GBS Venture Partners.

(3)

Dr. Harvey
became a director of our company in September 2011.

(4)

Mr. Marsh
retired from our board of directors in September 2011.

(5)

Mr. Waller
became a director of our company in August 2011.

All
amounts for cash payments in the table above were converted from Australian Dollars to U.S. Dollars using the conversion rate in effect on the date of invoices
submitted by the directors.

Pursuant to our director compensation policy approved by our stockholders in 2004, our non-employee directors were collectively entitled to receive a
maximum of A$250,000 ($255,775 based on a conversion rate of A$1 to $1.0231) in cash compensation for their service on our board of directors during the year ended June 30, 2011. In August
2011, in accordance with the ASX Listing Rules, our stockholders approved an increase to the maximum aggregate cash amount payable to our directors to $500,000 per fiscal year. Our board of directors
has the authority to allocate up to the maximum aggregate compensation among the directors in its discretion. For the fiscal year ended December 31, 2011, our board of directors paid each of
our directors, other than our Chairman and our directors affiliated with venture capital funds, A$50,000 in equal quarterly installments. Our Chairman was paid A$100,000 annually in equal quarterly
installments. We historically have not provided cash compensation to our directors affiliated with venture capital funds in connection with their service on our board. However, effective
October 1, 2011, we revised this policy so that our venture capital affiliated directors are compensated on the same basis as our other directors as described above.

Our
board grants directors stock options or equity awards from time to time, but we do not have a policy of regularly granting of equity or equity-based awards to our directors. All
equity compensation awarded to our directors requires approval by our stockholders pursuant to the ASX Listing Rules.

During
our six-month fiscal year ended December 31, 2011, we granted stock options to each of our non-employee directors. The stock options granted to each
of our non-employee directors other than Dr. Harvey and Mr. Waller have an exercise price of A$7.00
per share, representing a 20% premium to the closing price for one of our CDIs on the date the board approved the option grant, have a 10-year term and vest in equal monthly installments
over a four-year period. Our stockholders approved these options grants at a special meeting held in August 2011. Prior to these option grants, the last time we granted stock options to
non-employee directors generally was in July 2008. We also granted stock options to Mr. Waller and Dr. Harvey during our fiscal year ended December 31, 2011 in
connection with their appointments to our board of directors in August and September 2011, respectively. Each of these options has an exercise price of A$8.20 per share, representing the closing price
for one of our CDIs on the date the board approved the option grant, has a 10-year term and vests in equal monthly installments over a four-year period. Our stockholders
approved these options grants at our annual meeting held in November 2011. Although we previously had a practice of granting stock options to our non-employee directors with a per share
exercise price that was greater than the closing price of one of our CDIs on the date the board approved the option grant, which we believe is a typical practice for Australian companies listed on the
ASX, we intend to grant future stock options to our non-employee directors and other award recipients with exercise prices equal to the closing price of our common stock on the date of
grant consistent with what we believe is common practice for public companies listed on a U.S. stock exchange.

As
of December 31, 2011, each individual who served as a non-employee director during our fiscal year ended December 31, 2011 held options to purchase up to the
aggregate number of shares of common stock indicated below:

The following table sets forth certain information regarding compensation for the fiscal years ended June 30, 2011 and
December 31, 2011, provided to our Chief Executive Officer and the two other most highly compensated executive officers who received remuneration exceeding $100,000 during the fiscal year ended
December 31, 2011, who we refer to as our named executive officers.

SUMMARY COMPENSATION TABLE

Name and Principal Position

Fiscal
Year
Ended

Salary
($)

Option Awards
($)(1)

Non-Equity
Incentive Plan
Compensation
($)(2)

Total
($)

David Rosa

12/31/11

156,550

1,473,358

79,825

1,709,773

Chief Executive Officer

6/30/11

280,000

47,146

70,000

397,146

William Peters, MD(3)

12/31/11

143,542

(4)

529,493

28,663

(4)

701,698

Chief Medical Officer

6/30/11

275,433

(4)





275,433

Jeffrey Mathiesen(5)

12/31/11

106,667

377,666

44,000

528,333

Chief Financial Officer

6/30/11

59,879





59,879

(1)

Represents
the grant date fair value of the awards granted during the period computed in accordance with FASB ASC Topic 718. For a discussion
of the relevant assumptions used to determine the valuation of our option awards for accounting purposes please refer to Note 3 to the Notes to Consolidated Financial Statements included in
this prospectus.

(2)

Amounts
shown for Mr. Rosa, Dr. Peters and Mr. Mathiesen for fiscal year ended December 31, 2011 represent
non-equity incentive compensation earned during the 12-month calendar year ended December 31, 2011. As a result, the amounts shown for the fiscal year ended
December 31, 2011 were earned over the course of two different fiscal years, the last six months of our fiscal year ended June 30, 2011 and the full six-month fiscal year
ended December 31, 2011. The amount shown for Mr. Rosa for fiscal year ended June 30, 2011 represents non-equity incentive compensation earned during the
12-month calendar year ended December 31, 2010. As a result, the amount shown for the fiscal year ended June 30, 2011 was earned over the course of two different fiscal
years, the last six months of our fiscal year ended June 30, 2010 and the first six months of our fiscal year ended June 30, 2011.

Historically,
Mr. Rosa has been awarded incentive compensation based on performance and milestones achieved during calendar years despite
the fact that, until September 2011, our fiscal years ended on June 30. For Mr. Rosa, the material performance measures and milestones for calendar year 2010 related to development
projects, relocation of our headquarters to Eden Prairie, Minnesota, development of a minimally invasive procedure to implant our system, and building our executive management team. The material
performance measures and milestones for calendar year 2011 related to successful completion of our feasibility trial and progress on our planned pivotal trial, continued financing of our operations
and product development. Until our fiscal year beginning July 1, 2010, we historically awarded our employees based in Australia and New Zealand, including Dr. Peters, incentive
compensation based on performance and milestones achieved during our fiscal years, which ended on June 30. Our fiscal years historically ended on June 30 (until we changed our fiscal
year end in September 2011) because our operations previously were based in Australia, where a June 30 fiscal year end is more typical than in the United States due to the different seasons in
the Southern Hemisphere (i.e., where June 30 falls in winter similar to December 31 falling in winter in the Northern Hemisphere). As we began establishing operations in the United
States, we provided incentive compensation to our U.S.-based employees on a calendar year basis because we believed doing so was typical for U.S.-based companies.

Effective
for our fiscal year beginning January 1, 2012 and ending December 31, 2012, our board decided to base all employee
incentive compensation on performance and milestones achieved during calendar years, which, due to the change in our fiscal year effected in September 2011, will coincide with our fiscal year. As part
of this transition of our compensation practices, we deferred the incentive compensation opportunity Dr. Peters otherwise

would
have received for the fiscal year ended June 30, 2011 to be based on performance and milestones achieved during the 12-month calendar year ended December 31, 2011 and
Dr. Peters did not receive any incentive compensation based performance or milestones achieved during our fiscal year ended June 30, 2011. For Dr. Peters, the material performance
measures and milestones for calendar year 2011 related to our clinical trial and research and development activities.

We
chose the presentation format described above and reflected in the Summary Compensation Table to avoid any "gap" between consecutive periods
for which incentive compensation is earned by our named executive officers and incentive compensation information is presented in the table above and in similar tables that we will include in future
filings with the SEC.

(3)

All
amounts were paid to WSP Trading Limited, an entity that Dr. Peters owns.

(4)

Amount
was converted from Australian Dollars to U.S. Dollars using the conversion rate in effect on the date of payment.

(5)

Mr. Mathiesen
joined our company as Chief Financial Officer in March 2011.

Chief Executive Officer Employment Agreement and Compensation

We have an employment agreement with David Rosa, our Chief Executive Officer, which provides that his annual salary initially will be
$250,000 and is subject to annual review by our board of directors. The board established Mr. Rosa's initial annual base salary of $250,000 in late 2009 in connection with negotiating his
employment agreement. The board believed Mr. Rosa's initial base salary was less than the salaries paid to other chief executive officers of small public companies and was appropriate because
Mr. Rosa previously had not served as a chief executive officer of a public company. Effective January 1, 2011, the board increased Mr. Rosa's salary to $310,000 per year in
recognition of our company's progress towards its goals during calendar year 2010, which included the expansion of our management team, development of a less invasive procedure to implant our system
and progress on our feasibility clinical trial, as well as to closer align Mr. Rosa's base salary with those of chief executive officers of other small public companies as determined by the
board based on its collective experiences and industry knowledge.

Our
employment agreement with Mr. Rosa also provides that he will be eligible to participate in our short-term incentive bonus scheme with a maximum of up to 25% of
his annual salary. The amount of the bonus is determined by our board of directors based on goals agreed upon by Mr. Rosa and our board.

Historically,
Mr. Rosa has been awarded incentive compensation based on our performance and milestones achieved during calendar years despite the fact that, until September 2011,
our fiscal years ended on June 30. Beginning with 2012, our fiscal years will coincide with calendar years and with the time periods for which we provide incentive compensation to
Mr. Rosa and our other named executive officers.

Mr. Rosa's
incentive compensation goals for calendar year 2010 related to development projects, relocation of our headquarters to Eden Prairie, Minnesota, development of a
minimally invasive procedure to implant our system, and building our executive management team. Our board determined that Mr. Rosa achieved all of these goals and awarded him the maximum cash
incentive payment provided in his employment agreement for the year. The non-equity incentive plan compensation earned by Mr. Rosa during calendar year 2010 is reflected in the
Summary Compensation Table above for the fiscal year ended June 30, 2011 due to the discrepancy between our historic fiscal years and incentive compensation plan practices described above and
in footnote 2 to the Summary Compensation Table.

board
determined that Mr. Rosa achieved all of these goals and awarded him the maximum cash incentive payment provided in his employment agreement for calendar year 2011. The
non-equity incentive plan compensation earned by Mr. Rosa during calendar year 2011 is reflected in the Summary Compensation Table above for the fiscal year ended
December 31, 2011 due to the discrepancy between our historic fiscal years and incentive compensation plan practices described above and in footnote 2 to the Summary Compensation Table. We
chose the presentation format described above to avoid any "gap" between consecutive periods for which incentive compensation is earned by our named executive officers and incentive compensation
information is presented in the Summary Compensation Table above and in similar tables that will be included in future filings with the SEC.

Mr. Rosa
is entitled to participate in the benefit plans available to our employees generally. His employment agreement is terminable (i) by either party for any reason
with one month's notice, by mutual agreement of us and Mr. Rosa; (ii) by mutual agreement between us and Mr. Rosa; (iii) immediately by us for "cause" (as defined in the
agreement) if Mr. Rosa has not cured the conduct giving rise to a termination for "cause";
(iv) by us for Mr. Rosa's disability (as defined in the agreement); or (v) immediately by Mr. Rosa for "good reason" (as defined in the agreement) if we have not cured the
conduct giving rise to a termination for "good reason." The agreement also provides that, for one year following his termination, Mr. Rosa will not compete with us during the term of his
employment with us and he will not solicit any person who was one of our employees during the term of his employment.

Our
board of directors has granted Mr. Rosa stock options as part of his compensation from time to time. At a special meeting of our stockholders in August 2011, our stockholders
approved stock option awards awarded to Mr. Rosa by our board during March 2011 and May 2011. The March 2011 stock option award covers 154,450 shares of our common stock and was granted
with a per share exercise price of approximately $7.16 (using a conversion rate of A$1.00 to $1.0231 and representing a 20% premium to the closing price for our CDIs on the date the board approved the
award). The May 2011 stock option award covers 29,210 shares of our common stock and was granted with a per share exercise price of approximately $13.10 (using a conversion rate of A$1.00 to
$1.0231 and representing a 20% premium to the closing price for our CDIs on the date the board approved the award). At our annual meeting of stockholders in November 2011, our stockholders approved a
stock option award to Mr. Rosa approved by our board in November 2011. This November 2011 stock option award covers 50,000 shares of our common stock and was granted with a per share
exercise price of approximately $8.39 (using a conversion rate of A$1.00 to $1.0231 and equaling the closing price for our CDIs on the date the board approved the award).

The
ASX Listing Rules require stock options awarded to any of our directors, including Mr. Rosa, to be approved by our stockholders. For accounting purposes, stock options that
are granted subject to stockholder approval are treated as granted in the period during which the necessary stockholder approval was obtained. Because we held our annual meeting of stockholders during
our fiscal year ended June 30, 2011 before our board awarded the March 2011 and May 2011 stock options granted to Mr. Rosa, these stock options were approved by our stockholders at a
special meeting in August 2011 and are treated as granted during our six-month fiscal year ended December 31, 2011 even though our board awarded the options, subject to stockholder
approval, during our fiscal year ended June 30, 2011. Because Mr. Rosa also received a stock option award during November 2011 that was approved by our board and stockholders during the
same month, there is a significant discrepancy between the value for accounting purposes of option awards granted to Mr. Rosa during our fiscal year ended June 30, 2011 compared to our
six-month fiscal year ended December 31, 2011. In general, our board has awarded Mr. Rosa stock options with greater-than-annual frequency to
gradually give him an equity position in our company that our board, in its discretion and based on its collective experiences, believes is appropriate for the chief executive officer of a
development-stage public medical device company like ours. Other than the stock option awards described above, and as indicated in the Outstanding Equity Awards at Fiscal Year-End table
below, we have granted

Mr. Rosa
only one other equity award. As indicated in the Beneficial Ownership of Directors and Executive Officers table below, as of July 20, 2012, Mr. Rosa beneficially owned
approximately 1.7% of our common stock as calculated in accordance with SEC rules.

Salaries of Other Named Executive Officers

Our board determined the salary for Mr. Mathiesen pursuant to negotiations with Mr. Mathiesen in connection with his
hiring in March 2011. Our board determined Dr. Peters' salary in effect during our fiscal years ended June 30, 2011 and December 31, 2011 primarily based on the salary
recommendation our Chief Executive Officer made at the beginning of our fiscal year ended June 30, 2011. Historically, up to our fiscal year beginning July 1, 2011, we awarded our
employees based in Australia and New Zealand, including Dr. Peters, salary increases effective at the beginning of our fiscal years. Our Chief Executive Officer made his salary recommendation
for Dr. Peters based on his subjective evaluation of our product development and clinical progress as of the beginning of our fiscal year ended June 30, 2011. Effective for our fiscal
year beginning January 1, 2012 and ending December 31, 2012, our board decided to make annual adjustments to employees' salaries, regardless of location, effective at the beginning of
each calendar year (which, beginning in 2012, will coincide with our fiscal year). As part of this transition of our compensation practices, we deferred salary adjustments that our employees based in
Australia and New Zealand otherwise would have received effective July 1, 2011 to be effective as of January 1, 2012. Dr. Peters therefore was not awarded a salary increase during
the periods covered by the Summary Compensation Table in connection with this transition in our compensation practices.

Our
current compensation practice is for our Chief Executive Officer to recommend salaries for the other named executive officers at the beginning of each calendar year for the salary to
be paid for the that year based on our Chief Executive Officer's evaluation of three primary factors. Those factors are an evaluation of:



salaries of persons occupying similar positions at other small medical device companies;



the overall performance of our company for the prior year; and



the individual's contributions to our results for the prior year.

Our
Chief Executive Officer's evaluation of salaries for persons occupying similar positions at other small public medical device companies is based on his general industry knowledge and
consultation of proxy statements filed by U.S. publicly traded companies with the SEC. Our Chief Executive Officer uses this market information to help determine whether the salaries he recommends for
our other named executive officers are, in his opinion, significantly above or below the salaries of persons occupying similar positions at the companies consulted and that any variations to what the
Chief Executive Officer considers to be a "market" salary are in his opinion justified. Historically, our Chief Executive Officer has not targeted compensation at a specified point relative to the
market information he has gathered or used studies or compilations of information prepared by third parties to evaluate salaries paid by our competitors. Our Chief Executive Officer's evaluation of
our company's performance is a subjective evaluation of our progress toward commercializing our system and meeting our business plan. As of January 1, 2012, salaries for our named executive
officers were as follows: Mr. Rosa$319,300; Dr. PetersA$283,272; Mr. Mathiesen$226,600. Future adjustments to the salaries for our named
executive officers will be made using the process described above.

Incentive Compensation of Other Named Executive Officers

Dr. Peters' non-equity incentive plan compensation award for calendar year 2011 provided for a payment of up to 10%
of his annual salary, based on goals agreed upon by Dr. Peters and our Chief Executive Officer. Dr. Peters' goals for calendar year 2011 were tied to our clinical trial and research and
development activities. Based on Dr. Peters' work training and supporting physicians at sites participating in

our
feasibility trial, his work summarizing and presenting clinical trial data, the successful animal test for our next-generation fully implantable device and improvements to our existing
system developed by Dr. Peters during the year, our board awarded Dr. Peters his maximum possible payment under the non-equity incentive plan. The non-equity
incentive compensation earned by Dr. Peters during calendar year 2011 is reflected in the Summary Compensation Table above for the fiscal year ended December 31, 2011 due to the
discrepancy between our historic fiscal years and the transition in our incentive plan practices described in footnote 2 to the Summary Compensation Table.

In
connection with his hiring in March 2011, we decided that Mr. Mathiesen's incentive compensation would be based on the calendar year rather than our fiscal year in effect at
that time. Mr. Mathiesen's non-equity incentive plan compensation award for calendar year 2011 provided for a payment of up to 20% of his annual salary. Our board determined that
Mr. Mathiesen improved our financial reporting processes and successfully performed his duties for the year and awarded Mr. Mathiesen his maximum possible non-equity
incentive payment. The non-equity incentive compensation earned by Mr. Mathiesen during calendar year 2011 is reflected in the Summary Compensation Table above for the fiscal year
ended December 31, 2011 due to the discrepancy between our historic fiscal years and incentive compensation plan practices described above and in footnote 2 to the Summary Compensation Table.

Beginning
in 2012, our fiscal years will coincide with calendar years and with the relevant periods for which we provide incentive compensation to our named executive officers.

Outstanding Equity Awards at Fiscal Year End

The following table sets forth certain information concerning equity awards held by our named executive officers that were outstanding
as of December 31, 2011.

Option Awards

Name

Number of
Securities
Underlying
Unexercised
Options(#)
Exercisable

Number of
Securities
Underlying
Unexercised
Options(#)
Unexercisable

Option
Exercise
Price
($)(1)

Option
Expiration Date

David Rosa

37,500

(2)

12,500

$

10.23

11/29/20

28,960

(3)

125,490

$

7.16

8/17/21



(5)

29,210

$

13.10

8/17/21



(5)

43,000

$

8.39

11/28/21

William Peters, MD

3,990

(4)



$

3.17

1/30/13

3,880

(4)



$

51.16

7/5/14

2,200

(4)



$

36.83

11/1/16

280

(4)



$

61.39

1/31/17

3,000

(4)



$

61.39

4/18/17

488

(4)



$

40.92

7/9/18

3,249

(5)

1,477

$

16.37

8/20/18

15,140

(3)

65,605

$

7.16

8/17/21

Jeffrey Mathiesen



(5)

52,575

$

7.16

8/17/21



(5)

5,000

$

8.39

11/1/21

(1)

Amount
converted from Australian Dollars to U.S. Dollars using a conversion rate of A$1.00 to $1.0231.

This
option vested as to 50% of the shares on November 29, 2010, the date of grant, and 25% on November 1, 2011, and the
remaining 25% will vest on November 1, 2012.

(3)

This
option vests as to 1/48th of the shares per month until fully vested.

(4)

Option
fully vested as of December 31, 2011.

(5)

This
option vests as to 25% of the shares on the first anniversary of the date of grant, and 1/48th of the shares per month thereafter until
fully vested.

Change in Control Agreements

We have entered into change in control agreements with each of our named executive officers that will require us to provide
compensation to them in the event of a change in control of our company. Each agreement has a term that runs from its effective date through the later of (i) the five-year
anniversary of the effective date or (ii) if a "change in control" occurs on or prior to the five-year anniversary, the one-year anniversary of the effective date of the
change in control. The agreements will be automatically extended for successive two-year periods until notice of non-renewal is given by either party at least 60 days
prior to the end of the then-effective term.

Under
the change in control agreements, "change in control" means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following
events: (i) subject to certain exceptions, any person or group's acquisition, directly or indirectly, of more than 50% of the combined voting power of our outstanding securities other than by
virtue of a merger, consolidation or similar transaction; (ii) the consummation of a merger, consolidation, or similar transaction involving our company and immediately after the consummation
of such merger, consolidation or similar transaction, our stockholders immediately prior thereto do not directly own or beneficially own, either (A) outstanding voting securities representing
more than 50% of the combined outstanding voting power of the surviving entity in such merger, consolidation or similar transaction; or (B) more than 50% of the combined outstanding voting
power of the parent of the surviving entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their ownership of our outstanding voting
securities immediately prior to such transaction; (iii) there is consummated a sale, lease, exclusive license or other disposition of all or substantially all of the consolidated assets of our
company, other than a sale, lease, license or other disposition of all or substantially all of our consolidated assets to an entity, more than 50% of the combined voting power of the voting securities
of which are owned by our stockholders in substantially the same proportions as their ownership of our outstanding voting securities immediately prior to such transaction; or (iv) individuals
who, on March 17, 2011, were members of our board of directors cease to constitute at least a majority of the members of our board, provided that if the appointment, election or nomination for
election of any new board member was approved or recommended by a majority of the members of the board as of March 17, 2011, the board member will be treated as being a board member as of
March 17, 2011. Notwithstanding the foregoing, the term "change in control" will not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing our
domicile.

Our
change in control agreement with David Rosa, our Chief Executive Officer, provides that, if a change in control occurs during the term of his agreement and if Mr. Rosa's
employment terminates anytime during the one year period after the effective date of the change in control and if such termination is involuntary at our initiative without cause or is due to a
voluntary resignation for good reason, we will (1) pay in a lump sum his salary for 18 months and any other earned but unpaid compensation; (2) pay in a lump sum an amount equal
to the incentive bonus payment received by Mr. Rosa for the fiscal year immediately preceding the fiscal year in which the termination occurs; and (3) provide health care benefits

to
him and his family for the shorter of (i) 18 months after his termination; or (ii) until the date Mr. Rosa is and/or Mr. Rosa's covered dependents are eligible to
receive group medical and/or dental insurance coverage by a subsequent employer.

We
have also entered into change in control agreements with each of our named executive officers other than Mr. Rosa, which provide that if a change in control occurs during the
term of the officer's agreement and if the officer's employment terminates anytime during the one year period after the effective date of the change in control and if such termination is involuntary
at our initiative without cause or is due to a voluntary resignation for good reason, we will (1) pay in a lump sum such officer's salary for 12 months and
any other earned but unpaid compensation; (2) pay in a lump sum an amount equal to the incentive bonus payment received by such officer for the fiscal year immediately preceding the fiscal year
in which the termination occurs; and (3) provide health care benefits to such officer and such officer's family for the shorter of (i) 12 months after the termination; or
(ii) until the date the officer is and/or the officer's covered dependents are eligible to receive group medical and/or dental insurance coverage by a subsequent employer.

Additionally,
if any named executive officer terminates employment with us (i) during the term of the officer's change in control agreement due to a voluntary resignation for good
reason or due to an involuntary termination of an officer's employment by us without cause prior to a change in control and the expiration of the agreement's term (provided that the officer reasonably
demonstrates that such termination arose in connection with or in anticipation of a change in control); (ii) a change in control occurs within 90 days after the officer's termination;
and (iii) a change in control occurs within 90 days after the termination and occurs during the term of the officer's change in control agreement, then we will provide our named
executive officers the applicable payments and health benefits described above.

Under
the change in control agreements "cause" for termination exists upon the occurrence of any of the following events, if such event results in a demonstrably harmful impact on our
business or reputation: (i) such officer's commission of any felony or any crime involving fraud, dishonesty or moral turpitude; (ii) such officer's attempted commission of, or
participation in, a fraud or act of dishonesty against us; (iii) such officer's intentional, material violation of any contract or agreement between us and such officer or of any statutory duty
owed to us; (iv) such officer's unauthorized use or disclosure of our confidential information or trade secrets; or (v) such officer's gross misconduct.

Each
named executive officer may tender resignation for "good reason" after any of the following are undertaken without such officer's written consent: (i) a significant
diminution in officer's employment role with us as in effect immediately prior to the effective date of the change in control; (ii) a greater than 5% aggregate reduction by us in the officer's
annual base salary, as in effect on the effective date of the change in control or as increased thereafter unless the reduction is pursuant to an across-the-board proportionate
salary reduction for all officers, management-level and other salaried employees due to our financial condition, a greater than 10% aggregate reduction by us of the officer's annual base salary will
be required for "good reason" to exist; (iii) any failure by us to continue in effect any benefit plan or program, including fringe benefits, incentive plans and plans with respect to the
receipt of our securities, in which the officer is participating immediately prior to the effective date of the change in control, or any action by us that would adversely affect the officer's
participation in or reduce his benefits under those benefit plans unless we offer a range of benefit plans and programs that, taken as a whole, is comparable to the benefit plans in effect in which
the officer is participating immediately prior to the change in control; or (iv) a non-temporary relocation of the officer's business office to a location more than 50 miles from
the location at which the officer performs duties as of the effective date of the change in control, except for required travel by officer on our business to an extent substantially consistent with
the officer's business travel obligations prior to the change in control.

In
addition to the payments described above, the change in control agreements with the named executive officers provide that if a change in control occurs while such officer is actively
employed by us, such change in control will cause the immediate acceleration of the vesting of 100% of any unvested portion of any stock option awards held by the officer on the effective date of such
change in control.

We
will not make any of the payments described above unless: (i) the named executive officer signs a full release of any and all claims in favor of us; (ii) all applicable
consideration periods and rescission periods have expired; and (iii) as of the dates we provide any payments to the named executive officer, the officer is in strict compliance with the terms
of the applicable change in control agreement and any proprietary information agreement the officer has entered into with us.

Compensation Committee Interlocks and Insider Participation

The board members who served on our Remuneration and Nomination Committee during the fiscal year ended December 31, 2011 were
Dr. Geoffrey Brooke, Paul Buckman, Nicholas Callinan and Dr. Mark Harvey. During the fiscal year ended December 31, 2011, no person who served as a member of our Remuneration and
Nomination Committee was, during such period, an officer or employee of our company, or has ever been one of our officers, and no such person had any transaction with us required to be disclosed in
the "Certain Relationships and Related Party Transactions" section below. During the fiscal year ended December 31, 2011, (i) none of our executive officers served as a member of the
compensation committee of another entity, one of whose executive officers served on our Remuneration and Nomination Committee; (ii) none of our executive officers served as a director of
another entity, one of whose executive officers served on our Remuneration and Nomination Committee; and (iii) none of our executive officers served as a member of the compensation committee of
another entity, one of whose executive officers served as one of our directors.

Since July 1, 2009, we have entered into the following transactions with our directors, executive officers, holders of more than
5% of our voting securities, and affiliates of our directors, executive officers and five percent stockholders:

In
February 2012, we sold 62,500 shares of our common stock and warrants to purchase 18,750 shares of our common stock to Funds affiliated with Straus & Partners for an aggregate
purchase price of A$500,000 as part of a private placement. Funds affiliated with Straus & Partners beneficially own more than 5% of our common stock.

In
September 2011, we sold 14,375 shares of our common stock and warrants to purchase shares of our common stock to Jeffrey Mathiesen, our Chief Financial Officer, at the price of A$8.00
per unit as part of a private placement.

In
September 2011, we sold 125,000 shares of our common stock and warrants to purchase shares of our common stock to funds affiliated with CM Capital at the price of A$8.00 per unit as
part of a private placement. Funds affiliated with CM Capital beneficially own more than 5% of our common stock and Dr. Mark Harvey, one of our directors, is a partner of CM Capital.

In
August, 2011, we entered into indemnification agreements with each of our directors and executive officers that provide, in general, that we will indemnify them to the fullest extent
permitted by law in connection with their service to us or on our behalf.

We
are party to an agreement with WSP Trading Limited pursuant to which WSP Trading Limited performs technical and medical advisory services for us and we pay WSP A$283,272 annually
effective as of January 1, 2012. This agreement requires that Dr. William Peters serve as our Medical Director and Chief Technical Officer. We make payments to WSP rather than to
Dr. Peters directly for Dr. Peters' services to our company as Medical Director and Chief Technical Officer. Dr. Peters is a director of our company and WSP, and Dr. Peters
owns all of the equity of WSP.

The following table sets forth certain information with respect to the beneficial ownership of our outstanding common stock as of
July 20, 2012 by (i) each of our named executive officers; (ii) each of our directors; (iii) all of our executive officers and directors as a group; and (iv) each of
those known by us to be beneficial owners of more than 5% of our common stock. This table lists applicable percentage ownership based on 6,277,538 shares of common stock outstanding as of that date.

Beneficial
ownership is determined in accordance with the rules of the SEC. To our knowledge and subject to applicable community property laws, each of the holders of stock listed below
has sole voting and investment power as to the stock owned unless otherwise noted. The table below includes the number of shares underlying options which are exercisable within 60 days from the
date of this offering. Except as otherwise noted below, the address for each person or entity listed in the table is c/o Sunshine Heart, Inc., 12988 Valley View Road, Eden Prairie, Minnesota
55344.

Name of Beneficial Owner

Number of Shares

Percent(1)

Executive Officers and Directors:

Dr. Geoffrey Brooke

1,448,356

(2)

22.2

%

Paul Buckman

4,382

(3)

*

Nicholas Callinan

54,349

(4)

*

Dr. Mark Harvey

1,880,439

(5)

28.2

%

Jeffrey Mathiesen

38,404

(6)

*

Donal O'Dwyer

63,682

(7)

1.0

%

Dr. William Peters

90,834

(8)

1.4

%

David Rosa

106,156

(9)

1.7

%

Gregory Waller

3,165

(10)

*

All directors, director nominees, named executive officers and other executive officers as a group (12 persons)

3,724,614

(11)

52.0

%

5% Stockholders:

GBS Venture Partners Pty Ltd

1,443,671

(12)

22.1

%

Funds affiliated with CM Capital

1,877,498

(13)

28.2

%

Persons affiliated with Straus & Partners

653,057

(14)

10.7

%

New Emerging Medical Opportunities Fund LP

406,250

(15)

6.4

%

*

Less
than 1%.

(1)

Based
on 6,277,538 shares outstanding as of July 20, 2012.

(2)

Includes
1,194,761 shares owned by GBS Bioventures II A/C and GBS Bioventures III A/C, which we collectively refer to as GBS;
4,685 shares subject to outstanding options exercisable within 60 days of July 20, 2012; and 248,910 shares subject to outstanding warrants held by GBS exercisable within 60 days
of July 20, 2012. Dr. Brooke is a managing director of GBS Venture Partners Pty Ltd which manages GBS Bioventures II/AC. Dr. Brooke shares voting and investment
power with another partner and may be deemed to be an indirect beneficial owner of the reported securities. Dr. Brooke disclaims beneficial ownership of the reported securities except to the
extent of his pecuniary interest. This report

shall
not be deemed an admission that the reporting person is the beneficial owner of such securities for purposes of Section 16 or for any other purpose.

(3)

Includes
4,382 shares subject to outstanding options exercisable within 60 days of July 20, 2012.

(4)

Includes
29,647 shares owned by Beraleigh Pty Ltd. and 17,202 shares subject to outstanding options exercisable within 60 days
of July 20, 2012; and 7,500 shares subject to outstanding warrants held by Beraleigh Pty Ltd. exercisable within 60 days of July 20, 2012. Mr. Callinan is a director
of Beraleigh Pty Ltd.

(5)

Includes
750 shares owned by Dr. Harvey's pension fund, for which he has the power to make investment and voting decisions; 1,500,712
shares owned by venture capital funds affiliated with CM Capital; 376,786 outstanding warrants held by CM Capital and its affiliated funds exercisable within 60 days of July 20, 2012 and
2,191 shares subject to outstanding options exercisable within 60 days of July 20, 2012. Dr. Harvey shares voting and investment power with other partners and may be deemed to be
a beneficial owner of the reported securities. Dr. Harvey disclaims indirect beneficial ownership of the reported securities except to the extent of his pecuniary interest. This report shall
not be deemed an admission that Dr. Harvey is the beneficial owner of such securities for purposes of Section 16 or for any other purpose.

(6)

Includes
11,875 shares held by UBS which is Mr. Mathiesen's IRA account and 2,500 shares owned by Mr. Mathiesen. Includes 19,716
shares subject to outstanding options exercisable within 60 days of July 20, 2012; and 4,313 shares acquirable on exercise of outstanding warrants exercisable within 60 days of
July 20, 2012.

(7)

Includes
10,370 shares held by a family trust, for which Mr. O'Dwyer and his wife serve as a trustees, 38,791 shares held by a pension
fund for which Mr. O'Dwyer and his wife jointly have the power to make investment and voting decisions and 686 shares owned by Mr. O'Dwyer. Includes 4,685 shares subject to outstanding
options exercisable within 60 days of July 20, 2012; and 9,150 shares acquirable on exercise of outstanding warrants exercisable within 60 days of July 20, 2012.

(8)

Includes
7,250 shares owned by Dr. William Peters and Szigetvary Trustee Services Ltd as trustees to Peters JAM Trust; 35 shares
owned by Dr. William Peters for the benefit of Ava Peters; 35 shares owned by Dr. William Peters for the benefit of Michael Peters; 53 shares owned by Dr. William Peters for the
benefit of James Peters; 33,433 shares owned by Dr. William Peters and Apollo Trustees No. 1 Limited as trustees to Peters Apollo Trust; 47,987 shares acquirable upon exercise of
outstanding warrants exercisable within 60 days of July 20, 2012; and 2,041 shares subject to outstanding options exercisable within 60 days of July 20, 2012.

(9)

Includes
1,000 shares owned by Mr. Rosa, and 105,156 shares subject to outstanding options exercisable within 60 days of
July 20, 2012.

(10)

Includes
3,165 shares subject to outstanding options exercisable within 60 days of July 20, 2012.

(11)

Consists
of (i) 2,833,887 shares beneficially owned by the current directors and executive officers; and (ii) 890,727 shares
issuable upon exercise of outstanding options or warrants that are exercisable within 60 days of July 20, 2012.

(12)

Based
upon Form 3 filed with the SEC on February 28, 2012. Includes 1,194,761 shares beneficially owned by GBS Venture Partners
Pty Ltd affiliates, and includes 248,910 shares acquirable upon exercise of outstanding warrants exercisable within 60 days of July 20, 2012. Dr. Geoffrey Brooke and
Brigitte Smith of GBS Venture Partners Pty Ltd. hold voting and investment power with respect to these

Based
upon Form 3 filed with the SEC on February 28, 2012. Includes 1,500,712 shares beneficially owned by CM Capital
Investments Pty Ltd affiliates, and includes 376,786 shares acquirable upon exercise of outstanding warrants exercisable within 60 days of July 20, 2012. Michel Begun, Andy Jane,
Carrie Hillyard, Mark Gill and Dr. Mark Harvey are the partners of CM Capital Investments Pty Ltd and hold voting investment power with respect to these shares. The address for CM
Capital is Level 9, 545 Queen Street, Brisbane QLD 4000, Australia.

(14)

Based
upon Schedule 13G filed with the SEC on February 23, 2012. The address for the filing person is 767 Third Avenue,
21st Floor, New York, NY 10017. Straus Asset Management, L.L.C. reported shared voting and shared investment power with respect to 653,057 shares of our common stock. Straus Healthcare
Partners, L.P. reported shared voting and shared investment power with respect to 367,154 shares of our common stock. Melville Straus reported shared voting and shared investment power with
respect to 653,057 shares of our common stock.

(15)

Based
upon share registry provided to us by our transfer agent, Link Market Services Limited. Includes 93,750 shares subject to outstanding
warrants. Jérôme G.P Fund, Director and CEO of Sectoral Asset Management holds investment and voting power over these shares as investment manager for New Emerging
Medical Opportunities Fund LP. The address for New Emerging Medical Opportunities Fund LP is 1000 Sherbrooke St. West, #2120, Montreal, QC Canada H3A 3G4.

We are authorized to issue up to 100,000,000 shares of common stock, with a par value of $0.0001 per share and up to 40,000,000 shares
of preferred stock, with a par value of $0.0001 per share.

Outstanding Capital Stock

As of July 20, 2012, we had 6,277,538 shares of our common stock issued and outstanding and we had 31 holders of record of our
common stock. As of July 20, 2012, we had outstanding options to acquire 892,642 shares of common stock held by employees, directors, and consultants granted options to purchase our common
stock, as well as outstanding warrants to purchase 1,564,649 shares of common stock held by employees, directors, consultants, and investors.

Common Stock

Holders of our common stock are entitled to receive dividends when and as declared by our board of directors out of funds legally
available.

Holders
of our common stock are entitled to one vote for each share on each matter properly submitted to our stockholders for their vote; provided however, that except as otherwise
required by law, holders of our common stock will not be entitled to vote on any amendment to our certificate of incorporation (including any certificate of designation filed with respect to any
series of preferred stock) that relates solely to the terms of a series of outstanding preferred stock if the holders of such affected series are entitled, either separately or together as a class
with the holders of one or more other such series, to vote thereon by law or pursuant to our certificate of incorporation (including any certificate of designation filed with respect to any series of
preferred stock).

Subject
to the voting restrictions described above, holders of our common stock may adopt, amend or repeal our bylaws and/or alter certain provisions of our certificate of incorporation
with the affirmative vote of the stockholders of at least 662/3% of the voting power of all of the then-outstanding shares of our capital stock entitled to vote generally in
the election of directors, voting together as a single class, in
addition to any vote of the holders of a class or series of our stock required by law or our certificate of incorporation. The certain provisions of our certificate of incorporation that may be
altered only by the super-majority vote described above relate to:



the number of directors on our board of directors, the classification of our board of directors and the term of the
members of our board of directors;



the limitations on removal of any of our directors described below under "Anti-Takeover Effects
of Certain Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws";



the ability of our directors to fill any vacancy on our board of directors by the affirmative vote of a majority of the
directors then in office under certain circumstances;



the ability of our board of directors to adopt, amend or repeal our bylaws and the super-majority vote of our stockholders
required to adopt, amend or repeal our bylaws described above;



the limitation on action of our stockholders by written action described below under
"Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws";



the choice of forum provision described below under "Choice of Forum";

the limitations on director liability and indemnification described below under the heading "Limitation on Liability of
Directors and Officers and Indemnification"; and



the super-majority voting requirement to amend our certificate of incorporation described above.

Holders
of our common stock do not have any conversion, redemption or preemptive rights pursuant to our organizational documents. In the event of our dissolution, liquidation or winding
up, holders of our common stock are entitled to share ratably in any assets remaining after the satisfaction in full of the prior rights of creditors and the aggregate of any liquidation preference
pursuant to the terms of any certificate of designation filed with respect to any series of preferred stock. The rights, preferences, and privileges of the holders of our common stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.

The
foregoing description of our authorized capital, outstanding common stock and common stock is a summary only and is qualified in its entirety by reference to our certificate of
incorporation and bylaws, both of which are exhibits to the registration statement of which this prospectus is a part and have been filed with the SEC and are available at the SEC's website at www.sec.gov.

All
outstanding shares of our common stock are fully paid and non-assessable.

Preferred Stock

We may issue any class of preferred stock in any series. Our board of directors has the authority to establish and designate series,
and to fix the number of shares included in
each such series and to determine or alter for each such series, such voting powers, designation, preferences, and relative participating, optional, or other rights and such qualifications,
limitations or restrictions thereof. Our board of directors is not restricted in repurchasing or redeeming such stock while there is any arrearage in the payment of dividends or sinking fund
installments. Our board of directors is authorized to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. The number of authorized shares of preferred stock may be increased or decreased, but not below the number of shares thereof then outstanding, by the affirmative vote of
the holders of a majority of the common stock, without a vote of the holders of the preferred stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of
any certificate of designation filed with respect to any series of preferred stock.

CDIs

In order for our shares of common stock in the form of CDIs to trade electronically on the ASX, we participate in the electronic
transfer system known as the Clearing House Electronic Subregister System, or CHESS, operated by ASX Settlement Pty Limited, or ASX Settlement. ASX Settlement provides settlement services for ASX
markets to assist participants and issuers to understand the operation of the rules and procedures governing settlement facilities. The ASX Settlement Operating Rules form part of the overall listing
and market rules which we are required to comply with as an entity listed on ASX.

CHESS
is an electronic system which manages the settlement of transactions executed on ASX and facilitates the paperless transfer of legal title to ASX quoted securities. CHESS cannot be
used directly for the transfer of securities of companies domiciled in certain jurisdictions outside of Australia, such as the United States. Accordingly, to enable our shares of common stock to be
cleared and settled electronically through CHESS, we have issued and will continue to issue depositary interests called CDIs. No share certificates are issued in respect of shareholdings that are
quoted on ASX and settled on CHESS, nor is it a requirement for transfer forms to be executed in relation to transfers that occur on CHESS.

CDIs
confer the beneficial ownership in the shares of common stock on the CDI holder, with the legal title to such shares held by CHESS Depositary Nominees Pty Ltd, a wholly-owned
subsidiary of ASX, to act as our Australian depositary and issue CDIs. Every 200 CDIs represents beneficial ownership of one share of our common stock.

A
holder of CDIs who does not wish to have their trades settled in CDIs may request that their CDIs be converted into shares of common stock, in which case legal title to the shares of
common stock will be transferred to the holder of CDIs and a book entry for the shares of common stock will be made on the records of our transfer agent. If thereafter the holder wishes to sell their
investment on ASX, it will be necessary for them to convert their shares of common stock back into CDIs.

Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws

Certificate of Incorporation and Bylaws

Certain provisions of our certificate of incorporation and bylaws may be considered as having an anti-takeover effect, such
as those provisions:



providing for our board of directors to be divided into three classes with staggered three-year terms, with
only one class of directors being elected at each annual meeting of our stockholders and the other classes continuing for the remainder of their respective three-year terms;



authorizing our board of directors to issue from time to time any series of preferred stock and fix the voting powers,
designation, powers, preferences and rights of the shares of such series of preferred stock;



prohibiting stockholders from acting by written consent in lieu of a meeting;



requiring advance notice of stockholder intention to put forth director nominees or bring up other business at a
stockholders' meeting;



prohibiting stockholders from calling a special meeting of stockholders;



requiring a 662/3% super-majority stockholder approval in order for stockholders to alter, amend or repeal
certain provisions of our certificate of incorporation;



requiring a 662/3% super-majority stockholder approval in order for stockholders to adopt, amend or repeal
our bylaws;



providing that, subject to the rights of the holders of any series of preferred stock to elect additional directors under
specified circumstances, neither the board of directors nor any individual director may be removed without cause;



creating the possibility that our board of directors could prevent a coercive takeover of our company due to the
significant amount of authorized, but unissued shares of our common stock and preferred stock;



providing that, subject to the rights of the holders of any series of preferred stock, the number of directors shall be
fixed from time to time exclusively by our board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors; and



providing that any vacancies on our board of directors under certain circumstances will be filled only by a majority of
our board of directors then in office, even less than a quorum, and not by the stockholders.

We are also subject to Section 203 of the Delaware General Corporation Law, which in general prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder,
unless:



prior to that date, our board of directors approved either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder;



upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (but not the outstanding
voting stock owned by the interested stockholder) those shares owned by (i) persons who are directors and also officers and (ii) employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or



on or subsequent to that date, the business combination is approved by our board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 662/3% of the outstanding voting stock that is not owned by the interested
stockholder.

In
general, Section 203 defines an interested stockholder as an entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity
or person affiliated with or controlling or controlled by any of these entities or persons.

The
above-summarized provisions of the Delaware General Corporation Law and our certificate of incorporation and bylaws could make it more difficult to acquire us by means of a tender
offer, a proxy contest or otherwise, or to remove incumbent officers and directors. These provisions are expected to discourage certain types of coercive takeover practices and takeover bids that our
board of directors may consider inadequate and to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased
protection of our ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition
proposals because, among other things, negotiation of these proposals could result in an improvement of their terms.

Preemptive Right Pursuant to Securities Purchase Agreements

Pursuant to the securities purchase agreement, dated February 6, 2012, by and among us and the purchasers party thereto, the
purchasers thereunder have a contractual preemptive right to purchase equity, equity based and related securities, convertible securities, debt, preferred stock or purchase rights we offer, subject to
customary exclusions, through the first anniversary of the closing of the transactions contemplated by the securities purchase agreement. Prior to offering any of these securities during this period,
or within 30 days after the closing of any sale of these securities, we must offer to issue to the purchasers under the February 2012 securities purchase agreement, on the terms we are offering
the securities to third parties, an aggregate of 25% of the securities we are offering. The number of offered securities that each purchaser will have a right to subscribe for will be based on the
purchaser's pro rata portion of the aggregate number of common shares purchased under the February 2012 securities purchase agreement by all purchasers thereunder. If a purchaser fails to
purchase its pro rata share of the securities subject to the preemptive right, then that purchaser will no longer have preemptive rights pursuant to the February 2012 securities purchase
agreement for any subsequent placement of our securities. The preemptive right provided by the February 2012 securities purchase agreement is subject to certain customary exceptions, including
for

Within
30 days after the closing of this offering, we intend to offer the purchasers under the securities purchase agreement the number of shares we are required to offer them
thereunder in connection with this offering. Each purchaser will have 20 days from the date of receipt of our offer to elect to exercise the
purchaser's preemptive right under the February 2012 securities purchase agreement. We cannot determine at this time how many shares, if any, the purchasers under the February 2012 securities
purchase agreement will purchase pursuant to their preemptive rights thereunder.

Choice of Forum

Our certificate of incorporation provides that, unless we consent in writing otherwise, the Court of Chancery of the State of Delaware
will be the sole and exclusive forum for any (i) derivative action or proceeding brought on our behalf; (ii) action asserting a breach of fiduciary duty owed by any of our directors,
officers or other employees or any of our stockholders; (iii) action asserting a claim pursuant to the Delaware General Corporation Law; or (iv) action asserting a claim that is governed
by the internal affairs doctrine.

Limitation on Liability of Directors and Indemnification

Our certificate of incorporation limits the liability of our directors to the fullest extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for any:



breach of their duty of loyalty to us or our stockholders;



act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;



unlawful payment of dividends or redemption of shares as provided in Section 174 of the Delaware General
Corporation Law; or



transaction from which the directors derived an improper personal benefit.

These
limitations of liability do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies such as injunctive relief or
rescission.

Our
bylaws provide that we will indemnify and advance expenses to our directors and officers to the fullest extent permitted by law or, if applicable, pursuant to indemnification
agreements. They further provide that we may choose to indemnify our other employees or agents from time to time. Subject to certain exceptions and procedures, our bylaws also require us to advance to
any person who was or is a party, or is threatened to be made a party, to any proceeding by reason of the person's service as one of our directors or officers all expenses incurred by the person in
connection with such proceeding.

Section 145(g)
of the Delaware General Corporation Law and our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in connection with their services to us, regardless of whether our bylaws permit indemnification. We maintain a directors' and officers' liability insurance
policy.

We
entered into indemnification agreements with each of our directors and executive officers that provide, in general, that we will indemnify them to the fullest extent permitted by law
in connection with

their
service to us or on our behalf and, subject to certain exceptions and procedures, that we will advance to them all expenses that they incur in connection with any proceeding to which they are,
or are threatened to be, a party.

At
present, there is no pending litigation or proceeding involving any of our directors or officers as to which indemnification is required or permitted, and we are not aware of any
threatened litigation or proceeding that may result in a claim for indemnification.

Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Listing

Our common stock is listed on the Nasdaq Capital Market under the symbol of "SSH." Our shares of common stock in the form of CDIs are
listed on the ASX under the symbol "SHC."

Transfer Agent and Registrar

The transfer agent and registrar for transfers of shares of our common stock is American Stock Transfer & Trust
Company, LLC, or AST. AST's address is 6201 15th Avenue, Brooklyn, New York 11219 and its telephone number is (800) 937-5449. The transfer agent and registrar for
transactions in our CDIs on the ASX is Link Market Services Limited, or Link. Link's address is Level 12, 680 George Street, Sydney NSW 2000, Australia, and its telephone number is
+61 2 8280 7111.

A liquid trading market for our common stock may not develop or be sustained after this offering. We cannot predict the effect, if any,
that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock. Sales of substantial amounts of our common
stock in the public market, including shares issued upon exercise of outstanding options or in the public market after this offering, or the anticipation of these sales, could adversely affect the
market prices of our common stock and could impair our future ability to raise capital through the sale of our equity securities.

Upon
completion of this offering, based on our outstanding shares as of July 20, 2012, and assuming no exercise of outstanding options or warrants and that the number of shares
sold in this offering is the same as the number of shares on the cover of this prospectus, we will have outstanding an aggregate of 8,777,538 shares of our common stock (9,152,538 shares if the
underwriters' over-allotment option is exercised in full). Of these shares, all of the shares sold in this offering (plus any shares sold as a result of the underwriters' exercise of the
over-allotment option) will be freely tradable without restriction or further registration under the Securities Act, unless those shares are purchased by our affiliates as that term is
defined in Rule 144 under the Securities Act.

The
remaining 6,277,538 shares of common stock to be outstanding after this offering will be "restricted securities" under Rule 144. Of these restricted securities, 2,833,887
shares will be subject to transfer restrictions for 90 days from the date of this prospectus pursuant to lock-up agreements. Restricted securities may be sold in the public market
only if they have been registered or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act.

Pursuant
to a securities purchase agreement, dated February 6, 2012, by and among us and the purchasers party thereto, within 30 days after the closing of this offering, we
will offer to sell those purchasers an aggregate of 25% of the number shares sold in this offering plus the number of shares offered under these related preemptive rights, with the number of shares
each purchaser will have a right to purchase being based on the purchaser's pro rata portion of the total number of shares sold pursuant to the February 2012 securities purchase agreement. Any sales
we make pursuant to the February 2012 securities purchase agreement as a result of this offering will be on the same terms and conditions as this offering. We cannot determine at this time how many
shares, if any, the purchasers under the February 2012 securities purchase agreement will purchase pursuant to their rights thereunder. We intend to file with the SEC and have declared effective, a
registration statement covering all shares we sell pursuant to any exercise of these preemptive rights, and any shares we sell pursuant to these rights therefore would not be "restricted securities"
under Rule 144.

Lock-up Agreements

All of our officers and directors and the venture capital funds affiliated with two of our directors have entered into
lock-up agreements pursuant to which they have agreed, subject to limited exceptions, not to offer, sell or otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or securities convertible into or exchangeable or exercisable for shares of common stock for a period of 90 days from the date of this prospectus without the prior written consent of
Canaccord Genuity. Canaccord Genuity has advised us that it has no current intent or arrangement to release any of the shares subject to the lock-up agreements prior to the expiration of
the lock-up period. There are no contractually specified conditions for the waiver of lock-up restrictions and any waiver is at the sole discretion of Canaccord Genuity, which
may be granted by Canaccord Genuity for any reason. The 90-day lock-up period will be automatically extended if (i) during the last 17 days of the
90-day restricted period we issue an earnings release or announce

material
news or a material event or (ii) prior to the expiration of the 90-day restricted period, we announce that we will release earnings results during the 16-day
period following the last day of the 90-day period, in which case the restrictions described in this paragraph will continue to apply until the expiration of the 18-day period
beginning on the issuance of the earnings release or the announcement of the material news or material event. After the lock-up period, these shares may be sold, subject to applicable
securities laws. See the "Underwriting" section.

Rule 144

In general, and beginning 90 days after the effective date of our Form 10 filed with the SEC, under Rule 144 as in
effect on the date of this prospectus, a person who is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned shares of our common stock for at
least six months, would be entitled to sell an unlimited number of shares of our common stock provided current public information about us is available and, after owning such shares for at least one
year, would be entitled to sell an unlimited number of shares of our common stock without restriction.

Beginning
90 days after the effective date of our Form 10 filed with the SEC, our affiliates who have beneficially owned shares of our common stock for at least six months
are entitled to sell within any three-month period a number of shares that does not exceed the greater of:



1% of the number of shares of our common stock then outstanding; or



the average weekly trading volume of our common stock on the Nasdaq Capital Market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to the sale.

Sales
under Rule 144 by our affiliates are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. We
cannot estimate the number of shares of our common stock that our existing stockholders will elect to sell under Rule 144.

Options and Warrants

As of July 20, 2012, we had outstanding options to purchase 892,642 shares of our common stock, of which options to purchase
276,050 shares were vested, with a weighted average per share exercise price of $10.05 and expiration dates between January 30, 2013 and November 1, 2021. We also had reserved an
additional 123,820 shares of common stock for grants pursuant to our 2011 Equity Incentive Plan as of that date. We plan to file registration statements on Form S-8 under the
Securities Act to register the sale of shares issued or issuable upon the exercise of all these stock options and options and other awards issuable pursuant to our 2011 Equity Incentive Plan and 2002
Stock Plan. Our board of directors also has adopted, subject to approval of our stockholders, an amendment to our 2011 Equity Incentive Plan that would increase the number of shares that may be issued
thereunder on January 1 of each year beginning January 1, 2013 and ending on and including January 1, 2017 to be an amount equal to the difference between (i) 13% of the
fully diluted shares of our common stock deemed outstanding on the immediately preceding December 31 and (ii) the number of our shares of common stock issuable upon the exercise of
options then outstanding under our 2002 Stock Plan, unless our board determines that that the increase will involve a lesser number of shares (or no shares). Our stockholders will vote on this
proposed amendment to the 2011 Equity Incentive Plan prior to completion of this offering. Subject to the exercise of issued and outstanding options and contractual restrictions, shares of our
directors and executive officers to which Rule 701 is applicable or which are to be registered under the registration statements on Form S-8 will be available for sale into
the public market after the expiration of the 90-day lock-up period as described above, subject to the vesting requirements.

As
of July 20, 2012, warrants to purchase a total of 1,564,649 shares of our common stock were outstanding with a weighted average per share exercise price of A$7.49 (or
approximately $7.66 based on a conversion rate of A$1.00 to $1.0231) and expiration dates between June 2014 and February 2017. Any shares of common stock issued upon exercise of such warrants will be
restricted securities and may be sold in the public market only if registered or pursuant to an exemption from registration, such as Rule 144.

Rule 701

In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who
purchase shares of our common stock from us pursuant to options granted prior to the completion of this offering under our existing 2011 Equity Incentive Plan or other written agreement is eligible to
resell those shares 90 days after the effective date of our Form 10 in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period,
contained in Rule 144 and without regard to the volume of such sales or the availability of public information about us.

MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR COMMON STOCK

The following discussion summarizes certain material U.S. federal income and estate tax considerations relating to the acquisition,
ownership and disposition of our common stock purchased pursuant to this offering by a non-U.S. holder (as defined below). This discussion is based on the provisions of the U.S. Internal
Revenue Code of 1986, as amended, final, temporary and proposed U.S. Treasury regulations promulgated thereunder and current administrative rulings and judicial decisions, all as in effect as of the
date hereof. All of these authorities may be subject to differing interpretations or repealed, revoked or modified, possibly with retroactive effect, which could materially alter the tax consequences
to non-U.S. holders described in this prospectus.

There
can be no assurance that the IRS will not take a contrary position to the tax consequences described herein or that such position will not be sustained by a court. No ruling from
the IRS or opinion of counsel has been obtained with respect to the U.S. federal income or estate tax consequences to a non-U.S. holder of the purchase, ownership or disposition of our
common stock.

This discussion is for general information only and is not tax advice. All prospective non-U.S. holders of our common stock should consult their own
tax advisors with respect to
the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership and disposition of our common stock.

As
used in this discussion, the term "non-U.S. holder" means a beneficial owner of our common stock that is not any of the following for U.S. federal income tax
purposes:



an individual who is a citizen or a resident of the United States;



a corporation or other entity taxable as a corporation for U.S. federal income tax purposes that was created or organized
in or under the laws of the United States, any state thereof or the District of Columbia;



an estate whose income is subject to U.S. federal income taxation regardless of its source;



a trust (a) if a U.S. court is able to exercise primary supervision over the trust's administration and one or more
U.S. persons have the authority to control all of the trust's substantial decisions or (b) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S.
person; or



an entity that is disregarded as separate from its owner if all of its interests are owned by a single person described
above.

An
individual may be treated, for U.S. federal income tax purposes, as a resident of the United States in any calendar year by being present in the United States on at least
31 days in that calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. The 183-day test is
determined by counting all of the days the individual is treated as being present in the current year, one-third of such days in the immediately preceding year and one-sixth of
such days in the second preceding year. Residents are subject to U.S. federal income tax as if they were U.S. citizens.

This
discussion assumes that a prospective non-U.S. holder will hold shares of our common stock as a capital asset (generally, property held for investment). This discussion
does not address all aspects of U.S. federal income and estate taxation that may be relevant to a particular non-U.S. holder in light of that non-U.S. holder's individual
circumstances. In addition, this discussion does not address any aspect of U.S. state or local or non-U.S. taxes, or the special tax rules applicable to particular non-U.S.
holders, such as:

owners that hold our common stock as part of a straddle, hedge, conversion transaction, synthetic security or other
integrated investment; and



former citizens or residents of the United States subject to tax as expatriates.

If
a partnership or other entity treated as a partnership for U.S. federal income tax purposes is a beneficial owner of our common stock, the treatment of a partner in the partnership
generally will depend on the status of the partner and the activities of the partnership. We urge any beneficial owner of our common stock that is a partnership and partners in that partnership to
consult their tax advisors regarding the U.S. federal income tax consequences of acquiring, owning and disposing of our common stock.

Distributions on Our Common Stock

Any distribution on our common stock paid to non-U.S. holders will generally constitute a dividend for U.S. federal income
tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of our current and accumulated
earnings and profits will generally constitute a return of capital to the extent of the non-U.S. holder's adjusted tax basis in our common stock, and will be applied against and reduce the
non-U.S. holder's adjusted tax basis. Any remaining excess will be treated as capital gain, subject to the tax treatment described below in "Gain on Sale, Exchange or Other
Disposition of Our Common Stock."

Dividends
paid to a non-U.S. holder that are not treated as effectively connected with the non-U.S. holder's conduct of a trade or business in the United States
generally will be subject to withholding of U.S. federal income tax at a rate of 30% on the gross amount paid, unless the non-U.S. holder is entitled to an exemption from or reduced rate
of withholding under an applicable income tax treaty. In order to claim the benefit of a tax treaty or to claim an exemption from withholding, a non-U.S. holder must provide a properly
executed IRS Form W-8BEN (or successor form) prior to the payment of dividends. A non-U.S. holder eligible for a reduced rate of withholding pursuant to an income tax
treaty may be eligible to obtain a refund of any excess amounts withheld by timely filing an appropriate claim for a refund with the IRS.

Dividends
paid to a non-U.S. holder that are treated as effectively connected with a trade or business conducted by the non-U.S. holder within the United States
(and, if an applicable income tax treaty so provides, are also attributable to a permanent establishment or a fixed base maintained within the United States by the non-U.S. holder) are
generally exempt from the 30% withholding tax if the non-U.S. holder satisfies applicable certification and disclosure requirements. To obtain the exemption, a non-U.S. holder
must provide us with a properly executed IRS Form W-8ECI (or successor form) prior to the payment of the dividend. Dividends received by a non-U.S. holder that are
treated as effectively connected with a U.S. trade or business generally are subject to U.S. federal income tax at rates applicable to U.S. persons. A non-U.S. holder that is a corporation
may, under certain circumstances, be subject to an additional "branch profits tax" imposed at a rate of 30%, or such lower rate as specified by an applicable income tax treaty between the United
States and such holder's country of residence.

A
non-U.S. holder who provides us with an IRS Form W-8BEN or Form W-8ECI must update the form or submit a new form, as applicable, if
there is a change in circumstances that makes any information on such form incorrect.

Gain On Sale, Exchange or Other Disposition of Our Common Stock

In general, a non-U.S. holder will not be subject to any U.S. federal income tax or withholding on any gain realized from
the non-U.S. holder's sale, exchange or other disposition of shares of our common stock unless:



the gain is effectively connected with a U.S. trade or business (and, if an applicable income tax treaty so provides, is
also attributable to a permanent establishment or a fixed base maintained within the United States by the non-U.S. holder), in which case the gain will be taxed on a net income basis
generally in the same manner as if the non-U.S. holder were a U.S. person, and, if the non-U.S. holder is a corporation, the additional branch profits tax described above in
"Distributions on Our Common Stock" may also apply;



the non-U.S. holder is an individual who is present in the United States for 183 days or more in the
taxable year of the disposition and certain other conditions are met, in which case the non-U.S. holder will be subject to a 30% tax on the net gain derived from the disposition, which may
be offset by U.S.-source capital losses of the non-U.S. holder, if any; or



we are, or have been at any time during the five-year period preceding such disposition (or the
non-U.S. holder's holding period, if shorter), a "U.S. real property holding corporation."

Generally,
we will be a "U.S. real property holding corporation" if the fair market value of our U.S. real property interests equals or exceeds 50% of the sum of the fair market values
of our worldwide real property interests and other assets used or held for use in a trade or business, all as determined under applicable U.S. Treasury regulations. We believe that we have not been
and are not currently, and do not anticipate becoming in the future, a "U.S. real property holding corporation" for U.S. federal income tax purposes.

Backup Withholding and Information Reporting

We must report annually to the IRS and to each non-U.S. holder the amount of distributions paid to such holder and the
amount of tax withheld, if any. Copies of the information returns filed with the IRS to report the distributions and withholding may also be made available to the tax authorities in a country in which
the non-U.S. holder is a resident under the provisions of an applicable income tax treaty or agreement.

The
United States imposes a backup withholding tax on the gross amount of dividends and certain other types of payments (currently at a rate of 28%). Dividends paid to a
non-U.S. holder will not be subject to backup withholding if proper certification of foreign status (usually on IRS Form W-8BEN) is provided, and we do not have actual
knowledge or reason to know that the non-U.S. holder is a U.S. person. In addition, no backup withholding or information reporting will be required regarding the proceeds of a disposition
of our common stock made by a non-U.S. holder within the United States or conducted through certain U.S. financial intermediaries if we receive the certification of foreign status
described in the preceding sentence and we do not have actual knowledge or reason to know that such non-U.S. holder is a U.S. person or the non-U.S. holder otherwise
establishes an exemption. Non-U.S. holders should consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them.

Backup
withholding is not an additional tax. Amounts withheld under the backup withholding rules from a payment to a non-U.S. holder can be refunded or credited against the
non-U.S. holder's U.S. federal income tax liability, if any, provided that certain required information is furnished to the IRS in a timely manner.

Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act, commonly referred to as FATCA, which was ended in 2010, will generally impose a withholding tax
of 30% on dividends and the gross proceeds from sales or other dispositions of our common stock paid to a "foreign financial institution" unless such institution enters into an agreement with the U.S.
government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which would include
certain account holders that are foreign entities with U.S. owners). This legislation will also generally impose a withholding tax of 30% on dividends and the gross proceeds from sales or other
dispositions of our common stock paid to a "non-financial foreign entity" unless such entity provides the withholding agent with a certification identifying the direct and indirect U.S.
owners of the entity. These withholding taxes could potentially be imposed on dividends paid on our common stock after December 31, 2013, and on gross proceeds from sales or other dispositions
of our common stock after December 31, 2014. Under certain circumstances, a holder of our common stock may be eligible for a refund or credit of such taxes. All prospective investors should
consult with their own tax advisors regarding the possible implications of this legislation on their investment in our common stock.

U.S. Federal Estate Tax

An individual non-U.S. holder who is treated as the owner, or who has made certain lifetime transfers, of an interest in
our common stock will be required to include the value of the common stock in his or her gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax unless an
applicable estate tax treaty provides otherwise.

We are offering the shares of common stock described in this prospectus through a number of underwriters. Canaccord Genuity Inc. is
acting as sole book-running manager of the offering and as representative of the underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to
the underwriters, and each underwriter has agreed, severally and not jointly, to purchase, the number of shares indicated next to its name in the following table:

Underwriters

Number of Shares

Canaccord Genuity Inc.

Lazard Capital Markets LLC

Cowen and Company, LLC

Craig-Hallum Capital Group LLC

Northland Capital Markets

Total

2,500,000

The
underwriters are offering the common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of
the underwriters to pay for and accept delivery of the common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions.
The underwriting agreement provides that the underwriters are obligated to take and pay for all of the common stock if any such shares are purchased, other than those shares covered by the
over-allotment option described below.

The
underwriters have advised us that they propose to offer the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus,
and to selected dealers at the public offering price less a selling concession not in excess of $ per share. The underwriters also may allow, and dealers may reallow, a concession
not
in excess of $ per share to brokers and dealers. After the public offering of the shares, the underwriters may change the offering price and other selling terms.

Over-allotment Option

We have granted to the underwriters an option to purchase up to an aggregate of 375,000 additional shares of common stock from us at
the public offering price less the underwriting discount. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the
offering of the shares of common stock offered by this prospectus. The underwriters have up to 30 days from the date of this prospectus to exercise this over-allotment option. If
any shares are purchased with this over-allotment option, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares
of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.

The following table shows the public offering price, the total underwriting discounts to be paid to the underwriters by us and the
proceeds, before expenses, to us, both on a per share basis and in total. These amounts are shown assuming both no exercise and full exercise of the over-allotment option.

Total

Per Share

Without Over-
allotment Exercise

With Over-
allotment Exercise

Public offering price

$

$

$

Underwriting discounts paid by us

Proceeds, before expenses, to us

We
estimate expenses payable by us in connection with the offering of common stock, other than the underwriting discounts referred to above, will be approximately $725,000. This amount
includes our commitment to reimburse the underwriters for certain expenses up to an aggregate amount of $125,000.

Indemnification

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to
contribute to payments that the underwriters may be required to make in respect of those liabilities.

Potential Strategic Investment

A strategic investor, which is not a current stockholder of our company, has indicated an interest in purchasing approximately
$3 million of our common stock in this offering at the public offering price. However, because this indication of interest is not a binding agreement or commitment to purchase, the underwriters
may determine to sell more, less or no shares in this offering to this investor, or this investor may determine to purchase more, less or no shares in this offering. The underwriters will receive the
same discounts and commissions from any shares of our common stock purchased by this strategic investor as they will from any other shares of our common stock sold to the public in this offering. In
connection with this investment, we intend to enter into an agreement with this investor pursuant to which it will have the right to designate a board observer, who would be entitled to attend all
meetings of our board of directors, and all committees thereof, in each case subject to customary exclusions, as well as the right to review certain of our clinical and regulatory data. The investor
would maintain these observation and inspection rights for two years following the date we receive approval from the FDA to sell our C-Pulse System in the United States so long as it
beneficially owns at least 50% of the number of shares purchased in this offering.

Lock-up Agreements

We and our executive officers and directors and the venture capital funds affiliated with two of our directors have entered into
lock-up agreements with the underwriters. Under these agreements, we and each of these persons may not, without the prior written approval of Canaccord Genuity Inc., subject to limited
exceptions (including as needed to comply with the preemptive rights granted to purchasers under our February 2012 securities purchase agreement), offer, sell, assign, transfer, contract to sell, or
otherwise dispose of, or announce the intention to otherwise dispose of, or enter into any swap or other arrangement that transfers any economic consequences of ownership of our common stock or
securities convertible into or exercisable or exchangeable for our common stock. These restrictions will be in effect for a period of 90 days after the date of this prospectus. Notwithstanding
the termination of the lock-up period outlined

above,
and subject to certain exceptions, in the event that either (i) during the last 17 days of the lock-up period, we issue an earnings release or material news or a
material event relating to us occurs, or (ii) prior to the expiration of the lock-up period, we announce that we will
release earnings results during the 16-day period beginning on the last day of the lock-up period, then the expiration of the lock-up period will be extended until
the expiration of the 18-day period beginning on the date of the issuance of an earnings release or the occurrence of the material news or material event, as applicable, unless the
underwriter waives, in writing, such extension. At any time and without public notice, Canaccord Genuity may in its sole discretion release all or some of the securities from these lock-up
agreements.

Price Stabilization, Short Positions and Penalty Bids

Until distribution of the shares of our common stock is completed, SEC rules may limit the underwriters from bidding for and purchasing
shares of our common stock. However, the underwriters may engage in transactions that stabilize the price of the shares of our common stock, such as bids or purchases to peg, fix or maintain that
price.

If
the underwriters create a short position in our common stock in connection with this offering (i.e., if they sell more shares of our common stock than are listed on the cover page of
this prospectus), the underwriters may reduce that short position by purchasing shares of our common stock in the open market. The underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment option described above. Purchases of shares of our common stock to stabilize its price or to reduce a short position may cause the price of
shares of our common stock to be higher than it might be in the absence of such purchases.

The
underwriters also may impose a penalty bid, whereby the underwriters may reclaim selling concessions allowed to other broker-dealers in respect of the common stock sold in the
offering for their account if the underwriters repurchase the shares in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the
common stock, which may be higher than the price that might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the shares of our common stock in that it
discourages resales of those shares of our common stock. The underwriters have advised us that these transactions may be effected on the Nasdaq Capital Market or otherwise. Neither we nor the
underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of shares of our common stock. In
addition, neither we nor the underwriters make any representation that the underwriters will engage in these transactions or that these transactions, once commenced, will not be discontinued without
notice.

Electronic Distribution

This prospectus may be made available in electronic format on websites or through other online services maintained by the underwriters
of the offering, or by their affiliates. Other than the prospectus in electronic format, the information on such websites and any information contained in any other website maintained by the
underwriters or any of their affiliates is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or the
underwriters in their capacity as underwriters and should not be relied upon by investors.

Other Relationships

Certain of the underwriters and their affiliates have provided in the past to us and our affiliates and may provide from time to time
in the future certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they

may
receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers,
and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.

Northland
Capital Markets is the trade name for certain capital markets and investment banking services of Northland Securities, Inc., member FINRA/SIPC.

Sales Pursuant to Preemptive Rights

Pursuant to the securities purchase agreement, dated February 6, 2012, by and among us and the purchasers party thereto, the
purchasers thereunder have a contractual preemptive right to purchase equity, equity based and related securities, convertible securities, debt, preferred stock or purchase rights we offer, subject to
customary exclusions, through the first anniversary of the closing of the transactions contemplated by the February 2012 securities purchase agreement. Prior to offering any of these securities during
this period, or within 30 days after the closing of any sale of these securities, we must offer to issue to the purchasers under the February 2012 securities purchase agreement, on the terms we
are offering the securities to third parties, an aggregate of 25% of the securities we are offering. We intend to file with the SEC and have declared effective a registration statement covering all
shares that we sell pursuant to any exercise of these preemptive rights. Any shares to be issued and sold pursuant to the preemptive rights granted under the February 2012 securities purchase
agreement will not be sold through underwriters, and the underwriters in this offering will not otherwise be entitled to receive compensation for any sales of additional shares made pursuant to the
preemptive rights granted under the February 2012 securities purchase agreement.

European Economic Area

In relation to each member state of the European Economic Area that has implemented the Prospectus Directive, or each Relevant Member
State, with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State, or the Relevant Implementation Date, no offer of any securities that are
the subject of the offering contemplated by this prospectus has been or will be made to the public in that Relevant Member State other than any offer where a prospectus has been or will be published
in relation to such securities that has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the
relevant competent authority in that Relevant Member State in accordance with the Prospectus Directive, except that with effect from and including the Relevant Implementation Date, an offer of such
securities may be made to the public in that Relevant Member State:

(1)

to
any legal entity which is a "qualified investor" as defined in the Prospectus Directive;

(2)

to
fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons
(other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives of the underwriters
for any such offer; or

(3)

in
any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities shall require us or any
of the underwriters to publish a prospectus pursuant

to
Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.

For
the purposes of this provision, the expression an "offer to the public" in relation to any securities in any Relevant Member State means the communication in any form and by any
means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe the securities, as the same may be varied in
that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression "Prospectus Directive" means Directive 2003/71/EC (and
amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State and
the expression "2010 PD Amending Directive" means Directive 2010/73/EU.

United Kingdom

This prospectus is only being distributed to, and is only directed at, persons in the United Kingdom that are qualified investors
within the meaning of Article 2(1)(e) of the Prospectus Directive that are also (1) investment professionals falling within Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005, as amended, or the Order, and/or (2) high net worth
entities falling within Article 49(2)(a) to (d) of the Order and other persons to whom it may lawfully be communicated (each such person being referred to as a relevant person).

This
prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the
United Kingdom. Any person in the United Kingdom that is not a relevant person should not act or rely on this document or any of its contents.

Notice to Residents of Australia

Neither this prospectus, nor any other disclosure document in relation to the offer of shares of our common stock has been, or needs to
be, lodged with the Australian Securities and Investments Commission. This prospectus is not a Prospectus under Chapter 6D of the Corporations Act 2001 (Cth) (Corporations Act).

An
offer of shares of our common stock is made in Australia only to persons to whom it is lawful to offer shares without disclosure under one or more of the exemptions set out in
section 708 of the Corporations Act (an Exempt Person). By accepting this offer, an offeree represents that the offeree is an Exempt Person.

No
shares of our common stock will be issued or sold in circumstances that would require the giving of a Prospectus under Chapter 6D of the Corporations Act.

This
prospectus is not financial product advice and has been prepared without taking account of any individual's objectives, financial situation or needs. Accordingly, before any
eligible investor takes any action in response to this document, that investor should review this document, consider their own objectives, financial situation and needs and seek professional advice if
in any doubt.

The validity of the shares of common stock offered hereby and certain other legal matters will be passed upon for us by Faegre Baker
Daniels LLP, Minneapolis, Minnesota. The underwriters have been represented in connection with this offering by Jones Day, Palo Alto, California.

On
July 3, 2012 we issued a promissory note to Faegre Baker Daniels LLP, our outside legal counsel, in the principal amount of $282,707.64 with interest at 3% per annum accruing
thereon for fees for legal services due and payable to Faegre Baker Daniels LLP by us. This note is due and payable on the earliest to occur of (a) the closing by us of a debt or equity
financing that results in aggregate gross proceeds to us of at least $4,000,000 or (b) September 30, 2012. A portion of the proceeds from this offering will be used to repay such note.

EXPERTS

The consolidated financial statements of Sunshine Heart, Inc. at December 31, 2011 and 2010, and for the years then ended,
appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon (which
contains an explanatory paragraph describing conditions that raise substantial doubt about our ability to continue as a going concern as described in Note 1 to the consolidated financial
statements) appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

We are subject to the informational requirements of the Exchange Act, and file annual, quarterly and current reports, proxy statements,
and other information with the SEC. You can read the registration statement and our future filings with the SEC over the Internet at the SEC's website at www.sec.gov. You may request copies of the
filing, at no cost, by telephone at (952) 245-4200 or by mail at Sunshine Heart, Inc.,
12988 Valley View Road, Eden Prairie, Minnesota 55344. You may also read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference facilities.

We
have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock being offered by this prospectus.
This prospectus is part of that registration statement. This prospectus does not contain all of the information set forth in the registration statement or the exhibits to the registration statement.
Further information with respect to us and the share we are offering pursuant to this prospectus, you should refer to the registration statement and its exhibits. Statements contained in this
prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and you should refer to the copy of that contract or other documents filed as an
exhibit to the registration statement. You may read or obtain a copy of the registration statement at the SEC's public reference room and website referred to above.

We
have audited the accompanying consolidated balance sheets of Sunshine Heart, Inc. and subsidiary as of December 31, 2011 and 2010, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sunshine Heart, Inc. at December 31, 2011 and
2010, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with United States generally accepted accounting principles.

The
accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company's
recurring losses from operations and projected future capital requirements raise substantial doubt about its ability to continue as a going concern. The financial statements do not contain any
adjustments that might result from the outcome of this uncertainty.

/s/
Ernst & Young LLP

Minneapolis,
Minnesota
March 23, 2012, except for the change in the presentation of comprehensive income, discussed in Note 1 to the consolidated financial statements, as to which the date is July 17, 2012.

Nature of Business: Sunshine Heart ("we" or the "Company") was founded in November 1999 and incorporated in Delaware in August 2002. We are
headquartered in Eden Prairie, MN and have a wholly owned subsidiary, Sunshine Heart Company Pty Ltd, located in St Leonards, New South Wales, Australia. We are a medical device company
developing innovative technologies for cardiac and coronary disease. The Company's primary product, the C-Pulse® Heart Assist System, is an implantable, non-blood
contacting, heart assist therapy for the treatment of moderate to severe heart failure which can be implanted using a minimally invasive procedure. C-Pulse is designed to relieve the
symptoms of heart failure through the use of counter-pulsation technology by enabling an increase in cardiac output, an increase in coronary blood flow, and a reduction in the heart's pumping load.
The Company has received approval from the United States Food and Drug Administration to conduct a United States feasibility clinical trial with the C-Pulse System. Our shares of common
stock in the form of CHESS Depositary Interests (CDIs) have been publicly traded in Australia on the Australian Securities Exchange (ASX) since September 2004.

Going Concern: The Company's financial statements have been prepared and presented on a basis assuming it continues as a going concern.

During
the years ended December 31, 2011 and 2010, the Company incurred losses from operations and net cash outflows from operating activities as disclosed in the consolidated
statements of operations and cash flows, respectively. At December 31, 2011, we had an accumulated deficit of $65.2 million and we expect to incur losses for the foreseeable future. To
date, we have been funded by private and public equity financings. Although we believe that we will be able to successfully fund our operations, there can be no assurance that we will be able to do so
or that we will ever operate profitably.

The
Company's ability to continue as a going concern is dependent on the Company's ability to raise additional capital based on the achievement of existing milestones as and when
required. Should the future capital raising not be successful, the Company may not be able to continue as a going concern. Furthermore, the ability of the Company to continue as a going concern is
subject to the ability of the Company to develop and successfully commercialize the product being developed. If the Company is unable to obtain such funding of an amount and timing necessary to meet
its future operational plans, or to successfully commercialize its intellectual property, the Company may be unable to continue as a going concern. No adjustments have been made relating to the
recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company not continue as a going concern.

Basis of Presentation: The accompanying consolidated financial statements include the accounts of Sunshine Heart, Inc. and its
wholly-owned
subsidiary, Sunshine Heart Company Pty Ltd. (collectively, "Sunshine
Heart" or the "Company"). All inter-company accounts and transactions between consolidated entities have been eliminated.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America
requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements and accompanying notes. Actual results could differ from
those estimates.

Fair Value of Financial Instruments: Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable
and
accrued liabilities. We believe that the carrying amounts of the financial instruments approximate their respective current fair values due to their relatively short maturities.

Pursuant
to the requirements of the Fair Value Measurements and Disclosures Topic of the FASB Codification, the Company's financial assets and liabilities measured at fair value on a
recurring basis are classified and disclosed in one of the following three categories:

Level 2:
Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over the counter traded financial instruments. The prices for the
financial instruments are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates
and yield curves that are observable at commonly quoted intervals.

Level 3:
Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the
financial instrument. The prices are determined using significant unobservable inputs or valuation techniques.

All
cash and cash equivalents are considered Level 1 measurements for all periods presented. We do not have any financial instruments classified as Level 2 or
Level 3 and there were no movements between these categories.

Cash and Cash Equivalents: Cash and cash equivalents consist of cash, money market funds and term deposits with original maturities of three
months
or less. The carrying value of these instruments approximates fair value. The balances, at times, may exceed federally insured limits. We have not experienced any losses on our cash and cash
equivalents.

Accounts Receivable: Accounts receivable are unsecured, are recorded at net realizable value, and do not bear interest. We make judgments as
to our
ability to collect outstanding receivables based upon significant patterns of uncollectiblity, historical experience, and managements' evaluation of specific accounts and will provide an allowance for
credit losses when collection becomes doubtful. The Company performs credit evaluations of its customers' financial condition on an as-needed basis. Payment is generally due 30 days
from the invoice date and accounts past 30 days are individually analyzed for collectability. When all collection efforts have been exhausted, the account is written off against the related
allowance. No allowance for doubtful accounts was considered necessary as of December 31, 2011 or December 31, 2010.

Other Current Assets: Other current assets represent prepayments and deposits made by the Company.

Property, Plant and Equipment: Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed based upon
the
estimated useful lives of the respective assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the
assets. Repairs and maintenance costs are expensed as incurred. Major betterments and improvements, which extend the useful life of the item, are capitalized and depreciated. The cost and accumulated
depreciation of property, plant and equipment retired or otherwise disposed of are

removed
from the related accounts, and any residual values are charged or credited to expenses. Depreciation expense has been calculated using the following estimated useful lives:

Office furniture and equipment

5-15 years

Computer software and equipment

3-4 years

Laboratory and research equipment

3-15 years

Production equipment

7 years

Depreciation
expense was $49 and $32 for the years ended December 31, 2011 and 2010, respectively.

Impairment of Long-lived Assets: Long-lived assets, such as property and equipment, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the impairment tests indicate that the carrying value of the asset is greater than the
expected undiscounted cash flows to be generated by such asset, an impairment loss would be recognized. The impairment loss is determined as the amount by which the carrying value of such asset
exceeds its fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from such assets using an appropriate discount rate.
Assets to be disposed of are carried at the lower of their carrying value or fair value less costs to sell. Considerable management judgment is necessary to estimate the fair value of assets, and
accordingly, actual results could vary significantly from such estimates. There have been no impairment losses for long-lived assets, for the years ended December 31, 2011 and 2010.

Revenue Recognition: We recognize revenue when (i) persuasive evidence of a customer arrangement exists; (ii) the price is fixed or
determinable and free of contingencies or uncertainties; (iii) collectability is reasonably assured; and (iv) product delivery has occurred, which is when product title transfers to the
customer, or services have been rendered. Sales are not conditional based on customer acceptance provisions or installation obligations. Our C-Pulse Heart Assist System is not approved for
commercial sale. Our revenue consists solely of sales of the C-Pulse to hospitals and clinics under contract in conjunction with our clinical trials. For clinical trial implant revenue,
the product title generally
transfers on the date the product is implanted. We do not charge hospitals and clinics for shipping. We expense shipping costs at the time we report the related revenue and record them in cost of
sales.

Foreign Currency Translation and Transactions: Foreign denominated monetary assets and liabilities are translated at the rate of exchange
prevailing
at the balance sheet date. Results of operations are translated using the average rates prevailing during the reporting period. The translation adjustment has not been included in determining the
Company's net loss, but has been reported separately and is accumulated in a separate component of equity. Effective January 1, 2011, we concluded that the functional currency of our United
States based parent company is the U.S. Dollar. Prior to that date the functional currency of both the United States based parent company and the Company's Australian subsidiary was the Australian
dollar. For financial reporting purposes, the reporting currency of the company is the U.S. Dollar. When a transaction is denominated in a currency other than the entity's functional currency, the
Company recognizes a transaction gain or loss in net earnings.

Comprehensive Income (Loss): The components of comprehensive income (loss) include net income (loss) and the effects of foreign currency
translation
adjustments.

Stock-Based Compensation: The Company recognizes all share-based payments, including grants of stock options, to in the income statement as an
operating expense, based on their fair value over the requisite service period.

The
Company computes the estimated fair values of stock options using the Black-Scholes option pricing model. No tax benefit has been recorded due to the full valuation allowance on
deferred tax assets that the Company has recorded.

Stock-based
compensation expense is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates.

Equity
instruments issued to non-employees, and for services and goods are shares of the Company's common stock, warrants or options to purchase shares of the Company's
common stock. These shares, warrants or options are either fully-vested and exercisable at the date of grant or vest over a certain period during which services are provided. The Company expenses the
fair market value of these securities over the period in which the related services are received.

See
Note 3 for further information regarding the assumptions used to calculate the fair value of share-based compensation.

Income Taxes: Deferred income taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carry forwards. Deferred tax liabilities are recognized for taxable temporary differences, which are the differences between the reported amounts of
assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Net Loss per Share: Basic net loss attributable to common stockholders, on a per share basis, is computed by dividing income available to
common
stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired during the period
are weighted for the portion of the period that they were outstanding. The computation of diluted earnings per share, or EPS, is similar to the computation of basic EPS except that the denominator is
increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued and computed in accordance with the treasury stock
method. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back the after-tax amount of interest recognized in the period associated
with any convertible debt. Shares reserved for outstanding stock warrants and options totaling 2,216,615 and 1,310,987 for the years ended December 31, 2011 and 2010, respectively, were
excluded from the computation of loss per share as their effect was antidilutive due to the Company's net loss in each of those years.

Research and Development: Research and development expenses consist primarily of development personnel and non-employee contractor costs
related to the development of new products and services, enhancement of existing products and services, quality assurance and testing. The Company incurred research and development expenses of $11,199
and $6,229 for the years ended December 31, 2011 and 2010, respectively.

Reverse Stock Split: On January 24, 2012, the board of directors declared a 1-for-200 reverse stock split and a
corresponding inverse change in the transmutation ratio of CHESS Depositary Instruments ("CDIs") trading on the ASX in Australia such that one CDI will represent 1/200th of a share. The reverse
split and change in transmutation ratio became effective for trading on the ASX on January 30, 2012. All

share
and per share data included in the consolidated financial statements and accompanying notes have been adjusted to reflect this reverse stock split.

Subsequent Events: The Company evaluates events through the date the financial statements are filed for events requiring adjustment to or
disclosure
in the financial statements. See Note 7, Subsequent Events for additional information.

New Accounting Pronouncements: In June 2011, the FASB issued amended disclosure requirements for the presentation of comprehensive income.
The
amended guidance eliminates the option to present components of other comprehensive income ("OCI") as part of the statement of changes in equity. Under the amended guidance, all changes in OCI are to
be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. We adopted these changes effective January 1, 2012 and
applied retrospectively for all periods presented. There was no impact to the consolidated results as the amendments related only to changes in financial statement presentation.

In
May 2011, FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in United States GAAP and
IFRS. This accounting update generally aligns the principles for fair value measurements and the related disclosure requirements under United States GAAP and International
Financial Reporting Standards. From a United States GAAP perspective, the amendments are largely clarifications, but some could have a significant effect on certain companies. A number of new
disclosures also are required. Except for certain disclosures, the guidance applies to public and nonpublic companies and is to be applied prospectively. For public companies and nonpublic companies,
the amendments are effective during interim and annual periods beginning after December 15, 2011. Early adoption by public companies is not permitted. Nonpublic companies may apply the
amendments early, but no earlier than for interim periods beginning after December 15, 2011.

Note 2Balance Sheet Information

Property, Plant and Equipment

Property, plant and equipment were as follows:

December 31,
2011

December 31,
2010

Library

$

1

$

1

Office Furniture & Fixtures

177

90

Leasehold Improvements

251

78

Software

37

28

Production Equipment

293

179

Computer Equipment

134

65

Total

893

441

Accumulated Depreciation

(371

)

(321

)

$

522

$

120

Note 3Equity

Private Placement

In November and December, 2010, the Company placed 2,368,576 shares of common stock (in the form of CDIs) for proceeds, net of
transaction costs, of $11,917.

In
January 2011, the Company placed 17,858 shares of common stock (in the form of CDIs) for proceeds, net of transaction costs, of $99.

In
July 2011, the Company placed 572,222 shares of common stock (in the form of CDIs) for proceeds, net of transaction costs, of $4,597.

In
September 2011, the Company placed 349,444 shares of common stock (in the form of CDIs) for proceeds, net of transaction costs, of $2,838.

Stock Options

The Company recognized share-based compensation expense related to stock options and grants of common stock to employees, directors and
consultants of $939 and $78 during the years ended December 31, 2011 and 2010, respectively. The following table summarizes the stock-based compensation expense which was recognized in the
Consolidated Statements of Operations for the years ended December 31, 2011 and 2010:

December 31,
2011

December 31,
2010

Selling, general and administrative

$

621

$

55

Research and development

318

23

Total

$

939

$

78

As
of December 31, 2011 and December 31, 2010 the total compensation cost related to all nonvested awards not yet recognized was $4,582 and $94, respectively. This amount
is expected to be recognized over the remaining weighted-average period of 9.21 years as of December 31, 2011 and 1.19 years as of December 31, 2010.

The
Company has granted stock options to certain employees and directors under the Amended and Restated 2002 Stock Plan and its 2011 Equity Incentive Plan (collectively the "Plans"). The
Plans are designed to assist in the motivation and retention of employees and to recognize the importance of employees to the long-term performance and success of the Company. The Company
has also granted stock options to certain consultants outside of the Plans. The majority of the options to purchase common stock vest on the anniversary of the date of grant, which ranges from one to
four years. Additionally, certain stock options vest upon the closing price of the Company's common stock reaching certain minimum levels, as defined in the agreements. Finally, certain other stock
options vest upon the meeting of certain Company milestones such as the signing of specific agreements and the completion of the Company's anticipated listing on a United States stock exchange. As of
December 31, 2011, the Company expects that all such market and performance conditions will be met. Share-based compensation expense related to these awards is recognized on a
straight-line basis over the related vesting term. It is the Company's policy to issue new shares upon the exercise of options.

The
following is a summary of the Plan and non-Plan stock option activity during the year ended December 31, 2011 and 2010.

Options
Outstanding

Weighted
Average
Exercise
price

Remaining
Average
Contractual
Term
(Years)

Aggregate
Intrinsic
Value

Outstanding, December 31, 2009

78,789

$

37.94

2010 Grants

50,000

10.72

2010 Exercises





2010 Forfeitures/expiration

2,091

36.70

Outstanding, December 31, 2010

126,698

28.00

7.26

$

819

Exercisable at December 31, 2010

90,427

6.94

6.54

819

2011 Grants

794,926

7.64

2011 Exercises

1,560

6.58

2011 Forfeitures/expiration

33,231

13.02

Outstanding, December 31, 2011

886,833

$

10.05

9.21

$

62,674

Exercisable at December 31, 2011

184,296

$

18.74

10.06

$

24,013

The
aggregate intrinsic value is defined as the difference between the market value of the Company's common stock (based on the trading price of the Company's CDIs on ASX) as of the end
of the period and the exercise price of the in-the-money stock options. The total intrinsic value of stock options exercised during the years ended December 31, 2011 and
2010 was $3 and $0, respectively. Of the 702,537 non vested options, 40 are held by consultants, the majority of which vest in 2012. Total cash proceeds from exercised options were $10 and $0 for the
years ended December 31, 2011 and 2010, respectively.

The
weighted-average fair value of stock options granted during the years ended December 31, 2011 and 2010 was $6.62 and $10.72, respectively.

The
fair value of each stock option is estimated at the grant date using the Black-Scholes option pricing model. The Company has not historically paid dividends to its shareholders, and,
as a result assumed a dividend yield of 0%. The 2011 risk free interest rate is based upon the rates of US Treasury bins with a term equal to the expected term of the option. The 2010 risk free
interest rate is based upon the rates of Australian bonds with a term equal to the expected term of the option. The expected volatility is based upon the historical price of the Company's CDIs. The
expected term of the stock options to purchase common stock is based upon the outstanding contractual expected life of the stock option on the date of grant. The Company used the following
weighted-average assumptions in calculating the fair value of options granted during the years ended December 31, 2011 and 2010.

Warrants to purchase 1,496,032 and 1,223,787 shares of common stock were outstanding at December 31, 2011 and 2010,
respectively.

On
November 10, 2010, the Company issued 357,050 warrants at an exercise price of AU$6.40 and a term of 4 years as part of the private placements previously described.

Also,
as part of the private placements completed during 2010, the Company issued 850,737 warrants to purchase common stock at an exercise price of AU$6.40 per share. The warrants have a
stated life of four years.

As
part of the private placement completed during 2011, the Company issued 10,623 warrants to purchase common stock at an exercise price of AU$8.20 per share and 276,501 warrants to
purchase common stock at an exercise price of AU$11.20 per share. The warrants have a stated life of four years.

Additional
warrants to purchase common stock were issued in connection with the issuance of $800 convertible promissory notes in June 2004, which were issued as a bridging loan prior to
the initial public offering of the Company's CDIs on the ASX. These warrants were issued to related party entities affiliated with certain directors of the Company and to one unrelated party. The
warrants entitle the holders to receive 16,000 shares at an exercise price of AU$5.00. The warrants have an exercise period of ten years and expire in June 2014.

During
the year ended December 31, 2011, 14,879 warrants were exercised at a price of AU$6.40 for total proceeds of $99.

Note 4Income Taxes

Domestic and foreign loss before provision for income taxes consists of the following:

December 31,
2011

December 31,
2010

Domestic

(11,252

)

(2,207

)

Foreign

(4,944

)

(5,563

)

Total

(16,196

)

(8,270

)

The
components of income tax expense for the years ended December 31, 2011 and 2010 consist of the following:

Actual income tax expense differs from statutory federal income tax benefit for the years ended December 31, 2011 and 2010 as follows:

December 31,
2011

December 31,
2010

Statutory federal income tax benefit

(5,555

)

(2,812

)

State tax benefit, net of federal taxes

(727

)

(417

)

Foreign tax

199

225

R&D tax credit rebate

(265

)

(670

)

Valuation allowance increase

6,121

3,033

Other

112

(29

)

Total income tax (benefit) expense

(115

)

(670

)

Deferred
taxes as of December 31, 2011 and 2010 consist of the following:

December 31,
2011

December 31,
2010

Deferred tax assets (liabilities):

Accrued expenses

115

120

Stock based compensation

658

385

Capitalized patent costs

126

140

Deferred rent

78



Fixed assets

(76

)



R&D credits

150



Other

7

7

Net operating losses

22,357

16,210

23,415

16,862

Less: valuation allowance

(23,415

)

(16,862

)





As
of December 31, 2011, we had United States net operating loss (NOL) carryforwards of approximately $14.6 million for U.S. income tax purposes, which expire in 2023
through 2031, and NOLs in the Commonwealth of Australia of approximately $54.1 million which we can carry forward indefinitely. United States net operating loss carryforwards cannot be used to
offset taxable income in foreign jurisdictions. In addition, future utilization of net operating loss carryforwards in the United States may be subject to certain limitations under Section 382
of the Internal Revenue Code. This section generally relates to a 50 percent change in ownership of a company over a three-year period. No formal study has been prepared as of the
balance sheet date to determine any applicable limitations on the utilization of the United States net operating losses.

We
received a $670 fully refundable research and development tax credit in 2010, determined as a combined average of 44% of qualified research and development expenditures of our
Australian subsidiary for its tax period ended June 30, 2010. The Australian research and development tax credit is paid as a refundable credit to small and medium enterprises for tax years
ending on or before June 30, 2011, when total research and development expenses of the Australian subsidiary are less than A$2 million for the tax period. If total eligible research and
development expenses exceed A$2 million, the tax credit is instead applied as a carryforward reduction against future income taxes. We have not completed the Australian tax return for the
period ended June 30, 2011, and cannot be assured that our total eligible research and

development
expenses will be less than A$2 million. Therefore, we have reflected $0 net benefit related to the research and development credit for 2011. We also computed a $115 fully refundable
research and development tax credit for the state of Minnesota for the fiscal year ended June 30, 2011. This credit is computed as a percentage of qualified research expenditures that were
incurred in the state of Minnesota during the fiscal year. We have not yet completed a study to determine whether a similar credit will be generated for the six months ended December 31, 2011;
therefore, we have reflected $0 net benefit related to the Minnesota research and development credit for the six months ended December 31, 2011.

We
provide for a valuation allowance when it is more likely than not that we will not realize a portion of the deferred tax assets. We have established a valuation allowance for United
States and foreign deferred tax assets due to the uncertainty that enough taxable income will be generated in those taxing jurisdictions to utilize the assets. Therefore, we have not reflected any
benefit of such deferred tax assets in the accompanying financial statements. For the years ended December 31, 2011 and 2010, the valuation allowance increased by $6.6 million and
$4.5 million, respectively. Changes in the valuation allowance do not equal the amounts reflected in the statutory rate reconciliation due to fluctuating currency exchange rates.

The
Company has adopted accounting guidance related to uncertain tax positions. This accounting guidance prescribes a recognition threshold and measurement attribute for recognition and
measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The adoption of uncertain tax position guidance did not have a material impact on the Company's consolidated financial statements. Additionally, the adoption of the
guidance had no impact on retained earnings. The Company had no material uncertain tax positions as of December 31, 2011 or December 31, 2010.

We
recognize interest and penalties on unrecognized tax benefits as well as interest received from favorable tax settlements within income tax expense. Upon adoption of this guidance, we
recognized no interest or penalties related to uncertain tax positions. During the years ended December 31, 2011 and 2010 we recorded no accrued interest or penalties related to uncertain tax
positions.

The
fiscal tax years ended June 30, 2008 through December 31, 2011 remain open to examination by the Internal Revenue Service. For the states of California and Minnesota,
all years subsequent to the fiscal tax year ended June 30, 2006 are also open to examination. Additionally, the returns of the Company's Australian subsidiary are subject to examination by
Australian tax authorities for the fiscal tax years ended June 30, 2007 through June 30, 2011.

Note 5Commitments and Contingencies

Leases

We lease office space under non-cancelable operating leases that expire at various times through March 2016. Rent expense
related to operating leases was approximately $274 and $186 for the years ended December 31, 2011 and 2010, respectively. Future minimum lease payments under non-cancelable
operating leases as of December 31, 2011 were approximately $260, $194, $262, $267 and $67 for each the years ended December 31, 2012, through 2016, respectively.

Employee Benefits

All Australian employees are entitled to varying levels of benefits on retirement, disability or death. The superannuation plans
provide accumulated benefits. Employees contribute to the plans at various percentages of their wages and salaries. Contributions by the Company of up to 9% of employees' wages and salaries

are
legally enforceable in Australia. For the years ended December 31, 2011 and 2010, the Company incurred expense of $82 and $64, respectively.

Note 6Related Party Transaction

During the year ended December 31, 2011 and 2010, we paid $9 and $4 to SCP Technology and Growth Pty Limited, a company
controlled by a director of our Australian subsidiary, for the provision of intellectual property and patent services. There were no amounts outstanding to this entity at December 31, 2011 or
December 31, 2010. In September 2011, we sold 14,375 shares of our common stock to Jeffrey Mathiesen, our Chief Financial Officer, at the price of A$8.00 per share as part of a private
placement.

Note 7Subsequent Events

On February 9, 2012, we placed 259,000 shares of common stock for proceeds, net of transaction costs, of $2.1 million.

On
February 14, 2012, the SEC certified our common shares for listing on The Nasdaq Stock Exchange, effective that same day. Our common shares began trading on The Nasdaq Capital
Market on February 16, 2012 under the symbol "SSH."

Note 8Segment and Geographic Information

The Company has one reportable segment, cardiac and coronary disease products. The Company's geographic regions include the United
States and Australia.

Revenue
earned relating to reimbursement of clinical trials is earned primarily in the United States. Interest income is primarily earned in Australia.

Long-lived
assets are located primarily in the United States at December 31, 2011.